Credit scoring is a process that lenders - such as banks or building societies - use to work out the risk that potential borrowers will not repay what they owe.
They obtain information from two main sources: your application form and your credit report, which contains the history of your credit accounts and repayment record, plus other related data. Any previous or existing relationship with the lender may also be taken into account.
They then allocate each item a value, using a unique formula based on past and industry experience of other borrowers who have a similar profile and/or have taken out the same form of credit. The total is your credit score, also known as a credit rating.
You don’t have a single credit score, because every lender uses their own formula and some even use different weighting for different products, so you could get two separate credit scores on the same day from the same lender – for example, if you applied for a credit card and a loan.
Your credit score is a number, usually between 0 and 999. A high score represents a low risk that you will not make your repayments, whilst a low score suggests a high risk that you’ll default.
So, in general, a higher score makes it more likely that you’ll be able to get the credit deals you want, while a low score may make it difficult for you to get credit or the best interest rates. Credit ratings can also change over time, as your circumstances change.
From your application, lenders take data such as your salary, how long you’ve been in your job and how many dependents you have.
Your credit report helps them to see if you’re a responsible borrower, how much you’ve already borrowed and how well you manage repayments. At its heart are details of your credit accounts – from cards, loans and mortgages to utility bills, mobile phone contracts and some catalogue accounts. Other items that help lenders to assess your financial reliability include recent applications for credit and court judgements against you for bad debt, as well as IVAs (Individual Voluntary Arrangement) or bankruptcies. It is important to remember that missed repayments remain on your credit report for at least three years, while IVAs and bankruptcies are recorded for at least six years.
Your credit report also contains basic personal details, such as your full name and date of birth, and the names of people with whom you share a credit account. One important entry shows where you are registered to vote - lenders use this to confirm your address.
It is a good idea to have a regular credit check to make sure your report is accurate and up-to-date, and to look for suspicious entries that could mean you’re a victim of Identity theft.
