What is credit scoring?

what it is and how it affects your application

Banks or credit lenders use a sophisticated method of determining whether they will offer credit to an applicant via the use of credit scoring and this credit scoring will be formed from data available about you from your credit report.

Although companies such as Experian prepare credit reports that lenders will use to decide whether to lend, many lenders will have a slightly differing criteria for "scoring". Therefore, it is important to note that if there is an aspect of your credit report that flags a concern for one lender preventing them from offering credit, this may not be deemed as an issue at another lender. Obviously, the lenders would never publish their scoring systems though so it can be problematic in knowing what each provider values highest in terms of gaining a good credit score.

There are, however, general principals (many of them common sense, some on face value less so) that should help you towards obtaining and retaining a good credit score.

It is important to note that lenders will score credit applicants in their thousands if not millions so don't feel victimised if you are refused credit. You should rather take it upon yourself to work out why the credit was refused in the first place so you can try to rectify any problems so forthcoming applications have a better chance of being successful. A good starting point would be to obtain your credit report online. (It would be advisable to refrain from multiple credit applications if the first was refused, as each refusal will be entered in your credit report, potentially affecting future applications).

Your credit report can be obtained online and free from Experian. By perusing your online credit report you can make a more informed decision as to why a lender has refused you credit.

Remember that lenders will primarily offer credit because it is in their interests to do so. If your credit score is poor due to a history of late or non-payment of debts, the lender would consider offering credit as being high risk and as a consequence a threat to their overall profit if the applicant defaulted on payments. Perhaps unfairly, an applicant could also have a credit score worse than expected if they had a history of always paying e.g. a credit card payment on time. A consequence of this would be that the credit card company would earn no interest payments on the customer if they were always making their payments on time. This fact, which would be illustrated on the credit report, could contribute to other credit card companies declining to offer you a credit card, as they would perceive you to be a customer that would make them no profit!

It isn't all bad news though because if you are determined to have a good credit score, this will often be reflected in the offer of credit from the lender in the form of a lower rate of interest repayment on a loan or credit card.

CHECK YOUR FREE ONLINE CREDIT REPORT FROM EXPERIAN

For more detailed information on credit reports see our additional articles on the subject -

Credit reports - an introduction.

What is in a credit report?

Credit report pitfalls

How to improve a credit rating

Understanding your credit scoring

GET YOUR FREE ONLINE CREDIT REPORT FROM EXPERIAN

Any information offered here is general and should be considered as purely informational in nature. Information here should not be construed as advice and it is offered without legal responsibility or liability. It must be emphasised that you should consult a professionally qualified individual or company (such as an accountant, financial adviser or solicitor for example) should you need advice on your financial situation, as they will be able to tailor their advice to your situation accordingly.