Written by
Frank Ascot, Business expert
, 22 May 2018

CREDIT SCORING

Your credit score comes most into focus when your application is being assessed by lenders – and the range of people who extend credit to you is wider than you’d expect. Mortgages, credit cards and loans, mobile phone contracts, monthly car insurance, bank accounts and current account applications and more all involve being offered credit terms. It’s not just about improving your credit score to get through standard checks for products such as those listed above – a good or improved credit score can assist you to get the best rates in those credit agency assessment situations too.

Credit scoring can be a difficult area to get a grip on as lenders don't want it be widely understood – doing so may result in those with an interest in making bogus and inflated applications gaming the checks they carry out and it would take an advantage away from product providers and credit reference agencies who may want to extend new credit or current credit limits to you.

It’s important to know that there is no sole credit rating or score as such - each lender scores your application differently and secretly. It’s worth knowing therefore that just because one lender has rejected your an application that it doesn't automatically mean others will. After a rejection though, it's always important to check your credit file for errors before applying again. There are firms that specialise in lending to those who have had past credit problems too –although they often charge whacking interest rates.

The tools lenders use to decide on your credit scoring aren't universal either. As well as your credit file, they also look at application information and any past dealings they've had with you, and use the three sources of information to build up a picture of you.

Building up a Credit history

One great irony of credit scoring is that it’s difficult to score you if you've little credit history. When you apply for a product a 'credit check' and a credit score is carried out in an attempt to predict your future behaviour based on what you've done in the past. However what if you haven’t had much borrowing in the past? We have a second article where you can find help on how to build your credit history – it's aimed at students and younger people, but the theory applies to everyone else too.

The lending arena is as much about 'will you make the lender money' as it is about risk. Many people are turned down for credit when their circumstances are an almost perfect credit score and credit history having I've never or rarely missed a payment. Why therefore did they do a lender reject an application such as that. Of course, someone who is a bad risk is likely to be scored out as unprofitable by most companies. But the risk of not repaying isn't the be-all and end-all.

Credit card companies may for example reject you for always repaying cards in full. The most profitable customers are those constantly carrying debt from one or multiple sources, never defaulting, but always meeting at least the minimum repayment. However the outstanding debt and missing the odd payment is how lenders make a substantial amount of their profits (they can also profit from your data if they profile you successfully for another product sale to you or in the case of credit cards they earn fees when a car is used at a merchant).

Paying off your credit card in full every month is good, right?

Pay off your credit card in full every month, don't use your cards enough, or always shift debt to 0% cards, and if they can spot your behavioural pattern as an unprofitable customer (it isn't always that easy) then they might turn down an application you make to them

Banks score you based on products they'd like to sell you in the future - current account paying a high rate of interest on a small amount kept in it. Yet, when you apply, rather than scoring you as a bank account customer, it could actually be scoring to see if you're likely to be a profitable mortgage borrower in the future. You might face rejection if you aren't. The secretive nature of credit scoring makes this difficult to ever truly know. However each company has it as a key part of their customer profitability DNA and therefore why would they want to have their methods be an open book to either customers or potential lending competitors in the UK

The lending process

The application form...

  • In many ways this is the most important part of the process. Here, lenders obtain the crucial details of your post code, salary, family size, reason for the loan and whether you're a home owner, other assets and short term liabilities that you might have

  • Make sure you fill in the forms carefully. One slight slip, such as a "£2,000" salary rather than a "£3,000" one, can scupper any application. Mind you

  • Be consistent too, fraud scoring firms filter applications and if there are many inconsistencies – such as changing your job title each time you apply for credit or provide different phone numbers. Some lenders use internal processes and some use the same credit scoring external company to assess your credit risk. If you are showing up at the credit scoring agency with different data then they might just wonder if you are trying to game their system by giving different information to see what impact that has on their scoring. It maybe a sign of a fraudulent application which is why they might dismiss your application.

  • Companies use any data on previous dealings they've had with you to feed into the credit score. This means those with limited credit history may find their own bank more likely to lend to them than others. Of course, those who've had problems with a lender in the past may find it more difficult to get accepted there too.

Equifax, Experian, and Callcredit credit reference agency files

The three UK credit reference agencies compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. The big three credit rating assessors in the UK use different data sources but their data likely to come from four main sources:

1. Electoral roll information

This is publicly available and contains address and residence details.

2. Court records

County court judgments (CCJs), decrees, IVAs, bankruptcies and other court debt orders indicate if you have a history of debt problems.

3. Search, address and linked data

This includes records of other lenders that have searched your file when you've applied for credit, addresses you're linked to, or other people you have a financial association with.

The big gas and electricity firms do credit checks – these go on your file too.

4. Other lending account data

  • Banks, building societies, utility companies and other organisations use credit reference agencies to share details of all your account behaviour on credit/store cards, loans, mortgages, bank accounts, energy and mobile phone contracts from the last six years.

  • About 350 million records a month are tracked. The first type of information and the most common is 'default data', which shows where you're officially in default.

  • Some lenders share 'full data' too. This can incorporate how you generally operate the account, from being the model customer to defaulting. Some, including Barclaycard, Capital One, GE Money and MBNA, share the amount you repay too (if it's the minimum, or if you repay in full) and whether you've a promotional deal (plus if you use credit card cash advances, which you NEVER EVER should). This can mean lenders can better weed out those just playing the system.

  • Doorstep lenders too are legally obliged to share the data that they hold on you.

  • If you look to switch energy provider, or change from a prepayment meter to a normal credit meter (where you get a bill), it's likely to leave a footprint as many providers now share credit report data.

Written by
Frank Business expert
, 22 May 2018

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