Credit Scoring – What Is It And How Is It Calculated?

These days, everyone knows what a credit score is, and why it’s so important to their future.

Unfortunately, whether you earn a high income from your job or not, there’s a good chance that you’re going to need to apply for credit at some point. Whether you’re borrowing money to pay for your education, a new home, or a new car, getting a loan is a normal part of life.

Understanding your credit score is how you make sure that you’re in the right position to be approved for the money that you request. Unfortunately, while most people know what a credit score is, they don’t always understand how their score is calculated, or where it comes from.

Today, we’re going to introduce you to the basics of credit scoring and explain how the agencies determine what your score should be.

What is a Credit Score?

Whenever you apply for credit, whether it’s a mortgage, a bank loan, or something else entirely, the company that you’re asking for money for will ask for data about your credit history. The credit rating agencies, or CRAs, pull together the data that they have on you and transform it into a number that represents how much risk you pose to a lender.

There are 3 CRAs in the UK that cover most of the lending landscape, and each of these groups can give you a slightly different score, depending on the information that they hold about you. Some experts recommend getting a copy of your credit report from all three agencies. This gives you a chance to see the discrepancies between each option. It also means that you can check to see whether your credit report is wrong in any area.

The lenders who request your credit score use the number they receive in return to decide whether you’re a bad or a good borrower. If you have a poor credit score, then you might be refused your loan, or asked to pay higher interest rates, or according to different terms. If you have a good score, however, you might get a better deal on your loan.

How Do You Calculate a Credit Score?

So what elements make up your credit score? Essentially, your credit number comes from information that credit reference agencies hold about you. Lenders use this information to determine how suitable you are for a specific product. Information that might influence your credit score includes:

  • Application form details: Any information that you provide when filling out an application for a loan or credit product. Sometimes, factors like your current income and how long you’ve been employed with a specific company can make an impact on whether you get the credit that you ask for or not. Make sure that all of your details on any application are correct if you want the best chance of getting your credit.
  • Previous lending behaviour: The credit reference agencies receive information from other lenders about how you managed credit in the past. This could mean that if you’ve failed to pay your bills on time in the past, or you have a history of being in debt, then you won’t have a very good credit score. On the other hand, evidence that you’ve paid everything you owe on time will reflect positively on your credit score.
  • Electoral roll information: If you want to improve your credit rating fast, most people will recommend verifying your details on the electoral roll. This document gives information on your address and your voting rights. This information confirms your identity and makes it easier to determine that you are who you say you are.
  • Court information: Any appearance that you may have made in court that has something to do with your financial situation could have an impact on your lending capacity. You will need to make sure that your lender is aware of any bankruptcies or county court judgements you may have encountered in the past.
  • Other lender information: You will have a record on your credit score of other lenders that have looked at your file. If you have a lot of marks from other lenders, this indicates that you’ve made too many credit applications recently. This could indicate that you’re desperate for money, which might make you a more high-risk customer.
  • Financial associations: Anyone you’ve had a joint credit agreement within the past will be recorded on your credit statement too. This may include information on joint bank accounts that you’ve held with a partner or loans with a guarantor.
  • Fraud: If you have ever committed fraud with credit cards and other financial assets in the past, then this will show up on your reports too. This will appear alongside all of your other credit behaviour.

Figuring out Your Credit Score

Credit scores come from a thorough examination of all of your previous financial and credit behaviour. This includes an overview of all the transactions you’ve had with building societies and banks in the past, as well as transactions like loans, renting agreements, and credit cards. If you have repaid any debts that you have agreed to on time, then your credit score will be positive.

Of course, everyone makes mistakes sometimes. Getting control of your finances isn’t always easy, and some of the causes of bad credit can be very difficult to avoid. In some cases, you may even find that having no credit score is just as bad as having a poor one. If the agencies have no information about how you’ve interacted with lenders before, they can’t give you a positive score.

Your credit rating is something that the credit rating agencies calculate using information about your previous financial behaviour. This means that if you’ve never been in debt or had a credit card, there’s no evidence that you would pay the money you owe on time if you got it.

The good news is that even if you have a bad credit score, it won’t follow you around forever. The credit score you develop is there to give lenders a current idea of your financial situation as it stands right now. This is why an enquiry will usually stay on your report for up to 2 years. On the other hand, significant marks on your credit score can remain on public record for up to 6 years.

Do You Only Get One Credit Score?

Maintaining a healthy credit score is important because your score will influence your ability to get credit in multiple parts of your life. You might even find that your employer checks your credit score before hiring you to see whether you’re a sensible and well-balanced person.

However, you don’t just get one credit score, or a single credit report. Aside from the three credit reporting agencies in the UK today, every lender also has their own method of calculating credit scores to consider too. Each company might look at different information and take certain factors into account in certain ways when evaluating your credit information.

You may discover that some companies see a certain factor on your credit score as bad, while others see it as a positive thing, depending on what they’re looking for in a lender. Your score will often vary between each agency, company, and lender that you interact with.

If you’re not currently sure where you stand, it’s usually a good idea to get a look at your credit score before you start applying for any loans or lending agreements. You can find out your credit score for free by signing up to an online service, or you can issue a request by sending a form straight to one of the three UK credit agencies.

Remember that checking your credit score regularly can be helpful, as it’s a chance for you to make sure that there aren’t any errors in your information that might be preventing you from getting the money that you need. Keeping a close eye out for suspicious or unfamiliar information on your credit score could help you to protect yourself from issues like identity theft and fraud too.

Can You Improve Your Credit Score?

If you discover that your credit score isn’t as great as you would like it to be, don’t panic. First of all, it’s worth noting that many lenders will still offer credit to people with poor scores, although you may not get the best deal. There are also lenders out there specifically designed to support people with bad credit.

You can also work to improve your credit score – although it does take some time. There’s no overnight fix here. Instead, you’ll need to prove that you’re sensible with your money. That means only borrowing what you can afford and making sure that you can make the minimum repayment on your loan. Paying off your credit shows that you’re responsible and reliable.

It’s also a good idea to keep old and well-managed bank accounts when possible. Many credit-scoring agencies look at the age of your bank accounts, as well as what you do with them.

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