Your Credit Scoring explained
Posted on September 23rd, 2011
Finance lenders use credit scoring to help them decide whether or not to approve applications for loans, credit cards, mortgages and other forms of credit like mobile phone contracts. Since the recession we have seen credit scoring being used more and more to determine which interest rate an applicant should be charged depending on their credit profile.
A high credit score suggests to a lender that you are a safe risk and will be able to borrow and make repayments reliably. With a high credit score youre more likely to get the finance and deals that you want at the best interest rate on offer. A lower score suggests you may struggle to make repayments and possibly even default on a credit agreement, which could mean you find it difficult to borrow. If you are successful in obtaining fnance with a poor credit score then you will be offered finance at a very high interest rate. This reflects the risk that the lender percieves.
It makes sense to understand how you are credit scored armed with this information you can take steps to ensure that you have a high credit score.
Where does your credit score comes from
Lenders use two main sources of information to calculate a credit score details from your application form, such as annual income, and information from your credit report.
Your credit report shows how youve managed credit in the past and is the personal history of your credit accounts, from loans, cards and mortgages to utility bills and mobile phone contracts and even some catalogue accounts. As well as basic personal details, such as name, address and date of birth, it lists how much you have borrowed, your repayment history and other details that help lenders to assess how well you are coping with your current financial commitments. These range from recent applications for credit to court judgments against you for non-payment of debts and any late payments on your existing loans. Bankruptcies and IVAs are also listed and stay on your credit report for six years.
If you want to see this information for yourself, check your Experian credit report online with a free, 30-day trial of CreditExpert.
How is your credit score calculated?
Points are allocated based on the information on your credit report and application form and these are totalled to calculate your credit score. Different lenders use different formulas to calculate credit scores and some lenders even use different formulas for different products. You should also be aware that your credit score changes over time as your financial circumstances change. For example, clearing a debt or getting a pay increase could see it rise but skipping some repayments or making a number of credit applications in a short time could bring it down. All this means that your score can change every time you apply for credit.
How to find out your credit score
If you are preparing to make a new credit application or are curious about how a lender would view an application from you, its worth getting an idea of what your credit score is. During your free trial of CreditExpert, you can order your Experian Credit Score for just £5.95. Its based on the data held by Experian, the UKs largest credit reference agency, so it will give you a good indication of how most lenders will regard you.
If you dont score as well as youd hoped, theres advice on what you can do to improve your credit score before you make any more applications. And armed with a better credit score, you will increase your chances of being accepted and getting the deal you want.
How to boost your credit score
You can maximise your credit rating by making sure your credit report is in good order.
Steps to take should include
- Registering to vote at your current address: lenders use this information to confirm that you live where you say you do it helps to prevent fraud.
- Always making repayments on time and in full: lenders want to be sure that you are not overstretching yourself and can comfortably repay what you owe.
- Closing unused accounts: your current commitments will be based on the total amount you could potentially borrow, not how much you actually owe.
- Correcting any errors: even a minor clerical error or piece of out-of-date information could give the wrong impression and affect your credit score.
- Paying special attention to joint accounts: if youve still got an account with an ex-partner, make sure you close it. Your names will be linked on your credit report so if your ex-partner has problems, it could affect your credit score.
- Checking you credit report regularly: this should be part of your financial routine. A monthly check means that you know everything is accurate and up to date and allows you to spot suspicious entries, such as unfamiliar new applications or accounts, that could indicate youve become a victim of identity fraud. You can see your Experian credit report online at creditexpert.co.uk
reasons why your score may be lower
- Skipping repayments: missed payments stay on your credit report for three years, suggesting to lenders that you are not reliable. IVAs and bankruptcies will bring your credit score down for even longer they remain on your report for six years.
- Making too many credit applications: each application leaves a record, or footprint, on your report. If there are too many, lenders may think that you are desperate for money or that someone is making fraudulent credit applications.
- Living beyond your means: if youve taken out too much credit and are struggling to pay it back, theres nowhere to hide it will all be on your credit report.
- Lying on your application form: lenders will discover the truth sooner or later and its fraud, so youll be making things harder for yourself in the future.
Take control of your credit score today, use the CreditExpert service from Experian and receive e-mail alerts when there are significant changes to your credit report. You can sign up and try the service today with a free 30-day trial at creditexpert.co.uk
Your thoughts, experiences and comments are welcome. You can join the discussion below and leave your thoughts and experiences.
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Tags: Credit Scoring, Scoring
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