Credit Scoring explained
What is your credit score and why is it important?
Your credit score, or rating as its sometimes referred to, relates to your
financial health if you like. Every time you apply for a credit card, current
account, hire purchase agreement, mortgage or other financial commitment such
as a mobile phone contract, the bank or company you're buying from will credit
score your application. This involves them checking your credit worthiness to
satisfy themselves that you will be able to repay any money you borrow.
Points are awarded to the information you provide on your application, and
against information already held on your credit file or report (held by a credit
reference agency) based on past financial applications and current commitments.
All of this information is used to predict how big a risk the lender will be
taking in lending you money and will be used to help them decide things like:
- Whether to give you a credit card or loan
- What credit or overdraft limit to give you
- What interest rate to charge you
If your score doesn't reach the lenders pass mark, they may do one or more of
the following:
- Refuse your application
- Offer to lend you a smaller amount than you had applied for
- Charge you a higher rate of interest
Things that will help your credit score
Each lender has their own system. But generally these things will improve your score:
- Being in the same job for a long time
- Owning your home
- Having lived at the same address for a while (a year or more)
- Being on the Electoral Roll
Its important to understand your credit score and what affects it. Having a
good credit history, paying bills on time, not missing payments and not applying
for credit regularly will all help give you a good score. As every time you apply
for any type of credit, a score will be placed on your file, regardless of whether
you are accepted or you decide to take the credit offered, its important to do
your research before you apply for anything. Multiple attempts to gain credit in
a short space of time can make you seem desperate and therefore an unsafe person
to lend money to.
What to do if you're refused credit
Lenders don't go into detail about their scoring systems but should be able to
tell you the main reason they have declined to lend you money. They will also be
obliged to tell you the name of any credit reference agency they used. You have
the right to contact the agency and ask for a copy of your credit file. However
there may be a small charge for this.