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  • UPDATED - Credit Scoring Explained

    [COLOR=#ff8000][SIZE=5][CENTER]Credit Scoring Explained[/CENTER]
    [/SIZE][/COLOR]
    UK lenders use credit scoring to help decide whether they should lend you money. The information you provide on your application form and your details held by the credit reference agencies, such as Experian and Equifax, are compiled to work out your credit score. Your credit score determines whether you get accepted for a particular financial product, the lower your score is the greater the chance the lender will reject your application.

    [SIZE=5][COLOR=#ff8000]What is your credit score and why is it important?[/COLOR][/SIZE]
    Your credit score, or rating as it’s 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:
    [LIST=1][*]Whether to give you a credit card or loan[*]What credit or overdraft limit to give you[*]What interest rate to charge you[/LIST]
    If your score doesn’t reach the lender’s pass mark, they may do one or more of the following:
    [LIST=1][*]Refuse your application[*]Offer to lend you a smaller amount than you had applied for[*]Charge you a higher rate of interest[/LIST]
    [SIZE=5][COLOR=#ff8000]Things that will help your credit score[/COLOR][/SIZE]
    Each lender has their own system. But generally these things will improve your score:
    [LIST=1][*]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[/LIST]

    It’s 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, it’s 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.

    [SIZE=5][COLOR=#ff8000]What to do if you’re refused credit[/COLOR][/SIZE]
    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.

    Whilst each lender will score your application based on the services they offer and their own criteria, there are a number of general factors which will impact your credit score. Knowing the criteria could ultimately effect whether your application is accepted or declined; these are as follows:
    [LIST=1][*][B]Not on the Electoral Roll[/B]
    If you are not on the electoral roll at the address on the application there is a high probability of rejection.[*][B]Bad Credit History[/B]
    Past credit history usually counts for 35% of your credit score. Missed or late payments, County Court Judgements (CCJs) or defaults will have a negative impact on your credit report.[*][B]Continuity[/B]
    Lenders like continuity. This applies to residency as well as employment. A score will be higher if you have been at the same address for 3 years or more. Your credit score may be affected if you have been at your current address for less than 6 months. This criterion usually affects tenants more than homeowners. Similarly lenders are looking for someone who has had the same job for a number of years. Ideally you want to have been in your new job for a few months before applying for new credit as lenders often ask to see the last couple of months pay slips when applying for a loan. Having bouts of unemployment between jobs will more than likely have an adverse effect on your credit score.[*][B]No or New Bank Account[/B]
    Lenders will award maximum points if you have been with your bank for a number of years.[*][B]Too Many Credit Applications[/B]
    Every time you apply for credit a search is made and will be recorded on your credit file. Multiple credit applications in a short space of time will negatively impact your credit score. Such applications may be perceived as someone desperately trying to obtain credit.[/LIST]
    [SIZE=5][COLOR=#ff8000]How to build your Credit Score[/COLOR][/SIZE]
    [B]It's much easier to start from scratch than to repair black marks later on[/B]
    Your credit history is one of the main factors which will help to determine your credit score. It can effect whether you get a good job, a reasonable rate on your mortgage or even a lower rate for your insurance. One late payment, maxing out your credit cards or applying for too much credit at once can hurt your credit score for years.

    [B]Start from scratch - check your credit report[/B]
    Credit reports are used to create your credit score; this informs the lender of your ability to repay credit should they lend it to you. Equifax and Experian are the major credit reference agencies who carry out these credit reports. Even if you have never applied for credit it is still a good idea to get a credit report as there could be mistakes on your file or your identity could have been stolen to open bogus accounts. Report any problems on your credit report immediatley.

    [B]Open a savings account[/B]
    Lenders see accounts as a sign of stability.Opening a basic account is a step that is generally looked over but it will start to build your financial history.

    [B]Pay bills promptly[/B]
    It is fundamental in building your credit score to always pay your bills on time, starting from now! A single missed or late payment can seriously affect your score. Setting up direct debits is the best way to ensure payments are not missed.[INDENT][B][COLOR=#ff8000]--->[/COLOR][/B] [B][URL="http://www.moneymadeclear.org.uk/products/loans/credit_scoring.html"][COLOR=#ff8000]Money Made Clear guide to Credit Scoring[/COLOR][/URL][/B][/INDENT]
    Last edited by Never-In-Doubt; 26 January 2011, 04:07.
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