What you need to know about credit scoring

What is credit scoring?

A credit score shows companies what financial risk you pose. A good credit score means you are a low risk borrower; therefore, so you should receive more favourable terms in comparison to someone with a bad credit rating.

Fraud prevention agencies, high street stores, banks, and insurance companies send financial and behavioural information to credit reference agencies. There are three important agencies in the UK: Call Credit, Equifax and Experian. These companies do not recommend ‘good’ customers to companies, they only report who is more likely to repay credit.

There are generally five parts to your score:

•    Your payment history
•    How much you owe to your creditors
•    How long you have had access to credit
•    The percentage of new credit that you have
•    Other factors, such as the mix of credit facilities that you use.

These agencies hold different credit reports on each customer; not all companies report the exact same information to these agencies.

A good credit rating can help you to get:

•    Lower interest rates
•    Speedier credit approvals
•    Reduced deposits required by utilities
•    Better credit card, car loan and mortgage offers.

Why do lenders use credit scoring?

Lenders use your score to determine whether to give you a credit card or loan, what credit limits to give you and what interest rate to charge. Should you not meet the minimum score lenders may decline your application, offer a smaller amount than you had been hoping for or charge a higher rate of interest.

Lenders aren’t the only ones who determine your creditworthiness; your future employer, your landlord or mobile phone provider may also request a copy of your file.

The 3 most important ways to improve your credit scoring

1: Get on the electoral roll – lenders use this to verify your residential address.
2: Pay your bills when – or before – they are due.
3: Restrict the amount of credit that you use to approximately 30% of what is available.

Lenders prefer dealing with those who do not need credit. And it’s easier to convince them you fall into that category if you use as little of your credit as possible.

Is there a blacklist?

No, there is no such list. Lenders all have their own minimum criteria on which they base their decisions. Most of the data that credit reference agencies report are positive; a smaller percentage, however, is negative.

Nothing stays on your credit report forever. Missed payments stay on file for 36 months; CCJs stay for 6 years.

Your rights

You may not know why a lender had declined your application, and lenders may tell you which credit agency they had used to assess your risk. Ask for a review of your application if they had used an automated system.

Other things credit grantors can take into account:

•    Verification of identity
•    Validation of application details
•    Applicant’s income and existing commitments
•    Credit reference agency information
•    The credit grantor’s own prior experiences with that application/applicant
•    Any security offered