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What is credit scoringWhat Is Credit Scoring And How Does It Work?

By James Shaw

When you application for any form of credit whether it be a a personal loan, mortgage or credit card the lender uses credit scoring to make help them make decisions when granting credit.

Credit scoring involves a check on you past credit behaviour in order to help the lender decide what sort of borrower you are. Credit scores can differ from lender to lender just because you are declined by one lender does not mean you will be declined by all lenders. Its important to understand that you dont have just one independant credit score that all that determines your worthiness.

What makes up my credit score?

Credit scoring is a process in which lenders check information that they may hold about you, and any information they may obtain from credit reference agencies or fraud prevention agencies. They use this information from other organisations, to decide whether you are suitable for a certain product. However they do not use the information regarding race, gender, disability, colour and religion.

Credit reference agencies have some very srtict rules in regards to your information to ensure that your personal privacy is respected. Credit reference agencies will never disclose any personal information about you without your permission.

Credit scoring is a points system in which in which relevant information is added up and produce's a credit score. Lenders have a certain level levels as to which you must reach in order to be accepted for an credit application. If you fail to reach this level the lender may decline your application or in some case's you may be offered an altertive solution as to what you will be accepted for.

The points you are awarded depends entirely on a range factors these can be things such as what sort of repayments you have had on your credit history, how many years you have had credit for, if you have any existing debts and so on. This process allows banks to decide whether you a risk and predict whether you are likely to meet futre repayments.

Credit scoring is designed to ensure all applicants are treated fairly.

No matter how reliable a borrower you are there still is always a risk to the lender. Credit scoring one of the most common ways in which a lender estimate the risk factor when you apply for any form of credit.

Remember if you are rufused credit it does not mean that you have bad credit or are deemed as a high risk borrower. It simply means that based on the information available, the lender is notwilling to take you on as a possible risk of you defaulting on the agreement.

All lenders have different lending requirements and scoring systems, and so applications are all assessed in different ways. This means that if one lender declines an application another may accept it. You can always ask the lender about whether a credit-scoring technique will be used when you are applying for credit.

What information is held by credit reference agencies

Credit reference agencies hold information on the repayments of credit agreements from your past. This information is passed to them from lenders, although it is lenders are not required to supply this information doing so helps them recieve details when they details from the agencies to assist them when making credit decisions.

Lenders disclose certain information to credit reference agencies about debts that they ore owed by there customers. Information is disclosed where:

  • A customer has failed to keep up with their payments
  • the amount owed is not in dispute
  • the customer has not made any proposals satisfactory to the bank
  • the customer has been given at least 28 days' notice to disclose information.
  • Some banks also share performance data about their customers to further support responsible lending.

Lenders will only pass on further information about the customer to credit reference agencies when the customer has given his or her consent.

However, for fraud cases, data is disclosed regardless of consent. What and when information is disclosed to credit reference agencies is covered in the Banking Code.

The Banking Code states that all banks are required to provide certain standard information to customers. This includes informing customers about what checks they might make with credit reference agencies when an application is made and when these details may be passed to a credit reference agency.

The information held by credit reference agencies tends to differ between agencies. Normally they hold details of who is on the electoral roll, previous credit problems, bankruptcy, county court judgements and also the amout of applications you have made for credit cards is also held.

You can request a copy of the information help by a credit reference agency by writing to the following addresses. You must also incude a statutory £2.00 fee. You must include your full name and adresses you have lived at for the past six years. Credit records can also be ordered by telephone or via the internet. Ask your bank to find which credit reference agencies they have used.

Consumer Help Service, PO Box 8000
Nottingham, NG1 5GX
Telephone: 0870241 6212

Credit File Advice Centre
PO Box 1140, Bradford BD1 5US

PO Box 491
Leeds LS3 1WX

As well as having an impact on whether or not you can secure credit for mortgages, loans, credit cards and so on, your credit scoring can also affect what sort of interest rate you are offered on any borrowings. If you are seen as more of a high-risk borrower, it’s more likely that you will be required to pay a higher rate of interest on your debts than if you were seen as more low-risk.

In this way it’s important to make sure the credit information held on you is correct and as healthy as it can be. If you’re having trouble securing credit it is possible to improve your credit rating by always making sure you make repayments on time, and spacing out your applications for credit in the future.

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