Credit Scoring Explained

Niteflyer

I noticed in some previous posts that some of you have been a bit confused about credit scoring so I have detailed the ins and outs of it here for you

Would apreciate it if someone could make this a sticky please?

Thanks


There are many forms of credit out there. Examples include mortgages, credit cards, store cards, personal loans and "hire purchase" contracts. When considering any application for credit, the lender will want a cheap, simple and effective way to find out more information on the individual they are considering lending to, in particular when it comes to the potential borrower's financial history and outstanding credit.

The lender will contact a credit scoring company to assess the credit history of the individual. If, perhaps, they discover a trail of unpaid debt, then they will be far more reluctant to offer any credit than if it were a person that has no such problems.

Please remember that your credit score is an important piece of information for the lender, but that it is not the only factor considered when the lender makes their final decision. The key issues that most lenders, such as credit card companies, will look at alongside your credit score are:
Your level of income
Type of job (self-employed or employee)
Payment history
Whether you are a homeowner
Length of time at current address
Marital Status

There are numerous credit scoring companies, the biggest of which are Experian and Equifax, each with their own set of records. Each retailer and financial institution will usually have an agreement with one of these credit-scoring agencies. However, if credit is denied, it is solely the decision of the lender or retailer.

Here are a few examples:

Years in present employment Points
0-5 0
6-10 +15
11-12 +30
Over 12 +50

Marital Status Points
Divorced 0
Widowed +10
Married +40
Single +12

Age Points
21-25 0
26-30 +5
31-39 +40
40-59 +55
60+ +42

Number of children Points
None +30
1 +15
2 +5
3+ 0

Age of most recent bad debt Points
No debts +5
Less than 3 months -35
3-12 months -30
1-2 years -27
2-3 years -15

Telephone Points
Yes +20
No -30
Not answered 0

It's interesting, isn't it, how you get penalised for being divorced or for not having a phone? And why is a 24-year-old considered less responsible than a 34-year-old?

Other criteria include how long you've lived at a particular address (the longer the better) and whether or not you're on the electoral roll. Your postcode is also relevant because it indicates whether you live in an affluent area or not, and your profession counts too.

One very important factor is the number of applications for credit you've made. This is registered on your file and it counts against you if you've been applying for credit willy-nilly over a short period of time. It's far better to find out why a lender has turned you down in the first place instead of just applying somewhere else, just in case it's something you can rectify. Your credit file can also contain mistakes and, as you're allowed to correct any factual errors, it makes sense to obtain a copy of your file to check it.

Note that you're also allowed to add a brief statement to your file to explain a problem that might usually count against you, for example, why you briefly fell behind with your mortgage payments six months previously. There may be a good reason, which would help the lender to make a more informed decision.


Hope this helps some of you.


Matt

YorkshireBoy

Alternatively, check out Martin's article here...

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1101485056,23650,

Niteflyer

Yeah, you could but not a lot of people know that article exists do they!

So for those of you that are ineterested, just read away

Clariman

Hi niteflyer

Where did the scoring algorithms you quote come from ? Who uses those scoring numbers and are they UK based ?

Clariman

Niteflyer

Clariman wrote:

Hi niteflyer

Where did the scoring algorithms you quote come from ? Who uses those scoring numbers and are they UK based ?

Clariman

Hello Clariman,

The figures quoted are examples of various companies' scoring procedures. They have been compiled for me by 3 friends who work for various UK based companies.

The companies are NTL, Amber Credit (insurance services) and Natwest Card Services.

Matt

sicker

Hi Niteflyer. Where does 'retired with healthy income' appear in your scoring procedures? I would be interested to know.

John

Niteflyer

sicker wrote:

Hi Niteflyer. Where does 'retired with healthy income' appear in your scoring procedures? I would be interested to know.

John

To be honest with you, not too sure on that one, as I said these are just random examples of credit scoring and each company has a different criteria but I could ask one of the guys that did the research for me and let you know

Matt