What is a Credit Score?

24-Jun-2009

Responsible lenders want to know that you can comfortably afford to manage any new borrowing, so they calculate a credit score that helps them to assess the chances that you will be able to repay what you owe, or your 'riskiness' as a borrower.  To do this, they take information from two main sources - your credit report and your credit application form. If you are an existing or past customer, they will also use their experience of how you've managed repayments in the past.

The information they use

On your application form, lenders request personal information such as your salary, how long you've been in your job, whether you are a homeowner and how many dependents you have.  Key items in your credit report include your credit accounts, your repayment history, recent applications for credit, whether you have missed repayments in the past, taken out an IVA or been bankrupt - even whether you are registered to vote. You can see your credit report for free with CreditExpert.

Calculating a credit score

Lenders allocate a value to items from your application and credit report, using a formula based both on your financial past and on industry-wide statistical data on other borrowers with a similar profile and similar borrowing habits. The total amalgamation of all of this data is your credit score, also known as a credit rating.

Credit scores are a single number, usually between 0 and 1,000.  A high score usually represents a low risk that repayments will not be made, a low score suggests a higher risk that an account will fall into default.  So, in general, a higher score makes it more likely that you?ll be able to get the deals you want. A low score, on the other hand, may make it difficult for you to get credit or require you to pay higher interest rates.

Your credit score can change

Your credit score isn't set in stone - in fact, it will be different every time you apply for credit, because every lender uses a different formula and some even use different lending criteria for different products, such as credit cards and loans. So you could make three applications on the same day and get three different credit scores.  Credit scores also change over time, as your circumstances change. For example, paying off a loan could result in a higher credit score, while missing several repayments could negatively impact on your credit rating.

There is no magic number

Just as lenders use their own formula when calculating a credit score, they also set different thresholds for deciding whether to accept your application. Their lending thresholds can vary according to the type of credit you want, so you could be accepted for a mobile phone account but have a request for a car loan turned down.  Do your research before you apply, check your credit report in advance, make sure it's as up to date as possible and you stand a better chance of scoring well enough to get the deal that you want.

How well will you score?

You can get an idea of how you might fare when making a credit application by taking a free trial of CreditExpert, where you'll find lots of advice and tips on improving your credit rating. You can also order your Experian Credit Score for just £5.95. It won't be identical to a score calculated by a lender, because it's based only on your Experian credit report but it will give you some insight into the impact your credit history might have when lenders score you.