Credit scoring is the process lenders use to decide who to lend to and how much to charge in interest. Most credit scoring is done automatically by computer. Credit scoring takes into account details like how long you have lived at your current address, your income, how long you have been with your bank and how many credit cards you have. Your credit score may also depend on information about other accounts you hold with the company, for example, savings, or a mortgage.
Credit scoring will also normally include information from a credit reference agency. This will show if you are registered to vote and on the electoral roll. Being on the electoral roll at your address is important as it confirms that you live at your current address and that you lived at the addresses you have given for the times you have stated. The credit reference agency information will also show how you have handled credit in the past and if you have had any credit problems, like, missed or late payments, County Court Judgements and credit defaults.
Your credit score (also known as your credit rating) will also depend on how much you owe and what your credit limits are on credit cards, bank accounts, store cards and your mortgage. Credit scoring will also take into account previous credit applications you have made and if there is any evidence of fraud. If you are linked to anyone financially (by having a joint account or joint mortgage, for example) their information may also be taken into account.
Essentially you score a number of points for each bit of information in your application and from the credit reference agency. If you reach a certain number of points you are accepted for the application. If you don't score highly enough your application will be turned down, or it may be passed to someone in the credit company to review manually.
If you are turned down for credit, ask the company for a reason for the refusal. You can write to the company and ask it to review the decision. This is your opportunity to tell the company anything you feel would support your application.
Contrary to popular belief, there is also no such thing as a universal credit score as each lender has its own set of rules. Credit scoring is not an exact science and mistakes can be made. You can get an idea of your credit worthiness by checking your credit rating from credit reference agencies for an additional fee.
There is no easy way to improve your credit rating. However, there are some things you can do to make sure it is as high as possible. Don't be tempted to use a company that offers to improve your credit rating if you pay a fee. They can't do anything you can't do without it costing you a penny.
You should make sure the information in your application and on your credit reference agency is complete and accurate. Discrepancies in your application or with previous applications could lower your score and make it less likely lenders will want to lend to you.
Being on the electoral roll can boost your credit score so you should register to vote, even if you don't actually want to vote. Check that you are registered with the Electoral Commission at www.aboutmyvote.co.uk.
Lack of information on your credit file could also lower your credit score. Lenders want to see how you have handled credit in the past, so, not having any, or little credit history, can mean a lower score. It doesn't matter if this is because you simply haven't needed to or have deliberately decided not to borrow previously. The longer you have been at your address and the more time you have been with your bank and in your job, the better your credit score is likely to be.
Each time you apply for credit a search is recorded on your credit file. Too many searches can lower your credit rating - at least in the short term. You can ask lenders to remove any searches you have not authorised, or duplicate searches.
Removing people that you are no longer linked to financially could also improve your score. Removing addresses that you shouldn't be linked to could also increase your score.
If information on your credit file is incorrect you should approach the lender first as they provide the information to the credit reference agency. They should then arrange for the information to be amended. You could add a Notice of Correction to your credit file. This is an opportunity for you to explain the circumstances for information on your file, for example, to explain the background to a missed payment, or a County Court Judgement.
However Notices of Correction can mean that applications will not be accepted or declined automatically. This could delay your application and could mean that you are turned down when you would otherwise have been accepted for credit.