Nowadays credit scores and ratings are something that we are more aware of than ever. Not least because the credit crunch made more people apply for credit. However, lenders are rejecting more applicants than normal because of the reluctance to lend as much. Thus it makes us feel as if lenders are rejecting us all, on a regular basis, However, that is not the case. And a good credit score will still see lenders prepared to give you money. But what is one of them? And how is a credit score calculated?
The Process
Credit scoring means that when an individual makes an application for credit, lenders pull data together on your record of credit behaviour. This is in order to help the lender determine whether they feel they trust you to borrow. it is important to remember that you don’t have one independent credit score. There is not a universal score that lenders tap into a computer to decide your credit worthiness. Check out free reports with credit agencies. You will see that they use slightly different criteria. Nevertheless, they will all come to a similar conclusion.
Calculations
Instead, several credit bureaus compile your score. These agencies then inform your lender about your history with credit. For example how quickly you have paid back debt. Or whether you have any outstanding credit, and more. Lenders will then assess how suitable a borrower you are for whichever product you apply for. Contact them if you see mistakes. Ensure they correct them, to help your score improve.
Lenders
Lenders use the information that credit reference agencies give them in order to predict what sort of borrower you will be. There is a 3 digit number that helps them make decisions. Your credit file is essentially some data held about you that reflects your history with credit. It can give your lender an impression of how high-risk (and sometimes how high-profit) a borrower you are.
What makes up my credit score?
A credit score is devised with information held by credit reference agencies, which lenders use to determine your suitability for a product. But what data do banks use to make up your score?
How Is A Credit Score Calculated? Your application form
First and foremost you will have filled in an application form for credit. This is likely to include all the relevant information your lender needs relating to your income and more. They also look at employment circumstances, address, and so on. Although some of these details are only a formality, factors such as your income can play a part. They influence how credit-worthy lenders see you as. The reason for this is if you find yourself on a lower income, you are more likely to have trouble repaying debt.
It is vital to get all your details down precisely at this stage, as lenders use this as a starting point in predicting what sort of borrower you will be. So make sure you fill everything in correctly and are as honest as possible about your circumstances.
Past behaviour with the lender
This applies if you are seeking credit from a lender you have already had business with. For example, if you are a customer of a bank, your financial circumstances are relevant. Lenders will examine them as evidence. And they can check any past credit agreements. Even if you have not had previous business with the lender, your credit behaviour will still be held by credit reference agencies. And so they will look into it
If you have borrowed and repaid with banks successfully in the past, you are more likely to be seen as credit-worthy now. But if you have had a history of late payments, your application for credit will be looked on a little more sceptically.
How Is A Credit Score Calculated? Credit Reference Agencies
There are 3 main credit reference agencies in the UK who each hold information on your past credit behaviour. These are Equifax, Experian, and Callcredit.
When you make an application for credit, data from these reference agencies will be pooled together to build up a picture of you as a borrower – but what data will be held on you?
First of all it’s important to note that most of the data in your file will only go back 6 years. This means that the way in which you’ve borrowed and paid back in the last 6 years will be looked at primarily, without regard to your history before that point – although generally a history of bankruptcy or CCJs will be looked at too, however long ago they occurred.
Important Information
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Electoral roll: The electoral roll verifies your permanent address. It tells your local council that you are able to vote. This information will be used to confirm your address, how long you have lived there, who you live with, and other residential details that the lender is interested in.
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Court records. Any appearances in court you have made to do with debt or bankruptcies. And if you have any CCJs (County Court Judgments).
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Other lenders. A record will be held of other lenders who have searched your file. If you have lots of these it may indicate that you have made lots of applications for credit recently. This gives the impression you are very much in need of it. And therefore lenders mark you down as more of a ‘high-risk’ customer.
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Financial associations. Anyone that you have had a joint credit agreement with in the past, such as if you had credit card with a partner, will be recorded. If your partner’s credit history has been less than pristine this could affect you.
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Frauds. If you have committed a fraud with credit usage in the past this will be recorded.
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Credit Behaviour. This includes all the financial transactions you have had with banks and building societies. These may include loans, mortgages, bank accounts, credit cards, and more. This will show what your general behaviour is when it comes to dealing with your finances. It will indicate if you have repaid your debts on time. And whether you have a history of missed, defaulted or late payments.
How Is A Credit Score Calculated? Evaluations
Using all this information your prospective lender will then decide your suitability for the product you have applied for. This means that you do not have a credit score that you carry around with you as such, just a collection of information that can be used to assess your credit-worthiness when necessary.
In this way it’s important to be able to generate a healthy credit report. Thus, if you are ever in need of credit such as a loan or credit card, it will be available to you. Even if you like to keep away from credit and only spend what you have, it’s always useful to have a good financial grounding in case you need credit in an emergency.
How do I find out my credit score?
It is possible to look at the information held on you by credit reference agencies to see what kind of scoring you might be given by a prospective lender. To do this you can apply online to Experian, Equifax or Callcredit to see your credit file, although this often involves a fee.
You can also purchase a summary report from all 3 agencies by going to Checkmyfile, which will give you a good idea of the sort of information held on you. This will give you a chance to check that all the information is correct. It’s worth looking at the data held on you by all 3 agencies, as generally lenders will use a combination of 2 or 3 of the agencies to gather information.
