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Understanding your Credit Score

Understanding Your Credit Score

Whenever a consumer applies for a financial product such as a credit card or a loan their credit score may be used to help the financial services provider decide whether to approve their application or to turn them down. This score is a number that is calculated based on various factors -- from basic personal details through to information on the type and number of financial products the consumer holds and how they manage these products in terms of repayments and so on. This information is changed into a points system which gives each consumer his/her final 'score'.

Financial services companies look at the credit score number and (using their own internal guidelines) decide whether the number is high enough for them to approve an application. If the score is too low for them then the chances are they will turn down the application. This credit score is used to assess how much of a risk it would be for a lender to approve a financial product -- higher scores equal lower risks in this sector.

It's extremely important to make sure that a credit score is kept accurate and that a consumer does not inadvertently lower their own score by mistake. If this happens they may not find approval when it comes to trying to take out various kinds of financial products. Let's take a look at how the system works.

Credit reference agencies

Virtually every consumer has a file that is held by credit reference agencies. The major agencies in the UK include Experian, Equifax and Callcredit. These companies collate information -- both personal and financial -- about consumers and put this information together in a 'file'. It is this information that is most often used by financial services companies to work out a consumer's credit rating/score, although some will also use information from application forms to help them build up a score for an individual.

Whenever a consumer applies for a financial product such as a credit card or loan the lender will go to a credit reference agency to check the consumer's credit history so that they can establish a credit score for them. The information that they find here will (together with their own internal procedures) have an effect on whether they approve a consumer's application or turn it down.

Factors that can influence a credit score

The files that are held by credit reference agencies contain various kinds of information about the person including basic details such as where they live, how long they have lived there and whether they own their own home. They will also state whether the person is registered on the electoral roll, whether they have a telephone in their name, whether they are married or single and whether they are employed. The file will also contain information on the consumer's financial products. So, for example, it will list the financial products they hold such as bank accounts, mortgages, credit cards and loans and so on.

The information contained in this file is used to work out a consumer's credit score. This score is calculated based on the personal and financial information that the agency holds -- a consumer will be given a certain number of points for their marital status, age and financial management practises, for example. So, a consumer will score more points for being married and fewer if they have missed repayments on a loan, for example. Factors that can negatively influence the score include issues such as missed or late repayments, applying for a lot of financial products in a short period of time or being turned down for a particular financial product. Serious financial issues such as County Court Judgements and bankruptcy are also viewed as being negative. So, consumers would be wise to make sure that they:

Register themselves on the electoral roll. Lenders don't like people who aren't registered here and it will count as a negative mark.
Always make repayments on financial products on time. Missed and late payments will again count against a person's credit score as it makes them look like a risk. Lenders and finance companies like people who pay on time, every time.
Don't apply for too many financial products and services in short periods of time. This can count negatively and finance companies don't like to see too many applications at once. Quite often consumers do this without realising that it can have an adverse effect on their credit rating/score. They may not actually have any financial difficulties but some lenders may think that this kind of multiple application implies that they do. Also, this may lead lenders to turn consumers down for their products. A declined application in a consumer's credit file can also affect their credit score negatively.
Check their credit score/rating. Sometimes people with no financial problems and a healthy bank balance may be given negative scores simply because they haven't taken out any financial products in the recent past so checking the score before applying for financial products may be a useful thing to do.

Accessing a credit score/consumer rights

Anybody has the right to access their credit files, ratings and scores. This can be done via the three main credit reference companies (Experian, Equifax and Callcredit) who are legally bound to show consumers the information they hold on them if they request it. There is a fee to see the information which is currently set at £2 (this is based on postal cost and the fee is slightly higher if ordering a report by other means). It is also possible to subscribe to special services run by the credit reference agencies that give instant online access to information on a regular basis. If the information held by a credit reference agency is incorrect then a consumer has the right to have the information changed -- the agencies can advise on the actual procedures in this case.

Conclusion

Consumers need to remember that different financial companies will create different kinds of credit scores so it is virtually impossible to know what a score will be with any given company. This can mean that a consumer may be turned down by one financial services company whilst another will have no problem approving them for a credit card or loan. In order to keep problems to a minimum and scores as high as possible, consumers should make sure to check their score and be aware of any potential issues that may affect their credit-worthiness.