Credit Scoring: What is it and how does it affect me?

In recent years, a credit score has become an invaluable tool in the decision-making process of granting or declining an application for finance. As responsible lenders, banks and financial institutions take into account your personal circumstances in order to try to establish the appropriate level of credit to give to an applicant, and to help them do this, most lenders will calculate a credit score to help assess an application.

Credit scoring is the technique used to assess the probability of an applicant for finance being able to meet their financial commitments and is subject to an array of determining factors. In most cases, information used by companies to provide a credit score will include information from the applicant’s credit report, available from credit reference agencies such as Experian, along with other data such as how long the applicant has lived at their current address, their employment status, their earnings and outgoings and whether or not they are registered to vote.

Credit scoring works by allocating points for each piece of relevant information provided by the applicant and adds these points together to provide a score. If a score reaches or exceeds a certain level, then the lender is more likely to approve the application for finance. However, if the score fails to reach the required level, then the lender may decide to impose special terms (such as a higher APR), offer an alternative product or reject the application altogether.

Financial institutions are vastly experienced when it comes to assessing credit-risk, and in addition to an applicant’s credit score and personal information, most companies have access to a huge amount of statistical and demographic data. By combining these resources, lenders can provide a fair assessment of an applicant’s likelihood of being able to meet their financial obligations.

Once an application for finance has been approved, and repayments have begun, the lender can mark the agreement on the borrower’s credit report. This information can show whether a finance agreement is in good standing, in arrears or if the account is in default. Entries into a credit report by lenders can affect a borrower’s credit score, especially if they run into financial difficulties. Late payments and defaults can seriously damage a credit score making it extremely difficult to obtain credit in the future.

Many financial accounts that become defaulted are bought by debt collection agencies, such as Capquest Debt Recovery. These companies specialise in the collection of unpaid and delinquent debts. However, when a debt is bought by such companies and repayment has been established, a borrower’s credit report doesn’t show that repayments are being made. As such, this means that as far as lenders are concerned a debt remains unpaid, even if the borrower pays off the debt in full. However, there are discussions in place between financial companies and credit reference agencies that may allow debt collection agencies to be able to report on a debtor’s credit file, so repayment histories can be shown and credit scores amended accordingly.

With the recent upsurge in identity fraud, it is becoming more and more common to find erroneous entries on a consumer’s credit report, so it’s a good idea to check your credit report from time to time, in order to make sure that information held on your report is accurate and showing all the relevant information. After all, any potential borrowing you might consider is influenced by the data on your credit report, whether it is legitimate or not and this will be reflected in any future credit-scoring that lenders might perform the next time you apply for finance.