Credit Scoring

What is Credit Scoring?

Credit scoring is performed by finance lenders to assess the risk of offering credit or loaning a sum of money to an individual, couple or business. Credit scoring takes the form of a numeric expression, with an individual’s credit score provided to finance lenders by three major agencies who focus on credit reporting: TransUnion, Equifax and Experian.

Why is Credit Scoring used?

Credit scoring is used amongst other factors to determine whether to extend or deny credit once a credit application has been made. A lower credit score means that it is a higher risk to enter into a contract with the borrower, however no individual has a universal credit score and this score will differ depending on which credit reference agency is used to calculate your credit score.

Minimum and Maximum Credit Scores

Minimum and maximum credit scores are dependent on which agency you use. For example the maximum credit score for Equifax is 700, whereas is it 850 for TransUnion and 999 for Experian. This outlines how complicated credit scoring really is, as there are no set guidelines to outline to you how each financial movement you make will affect your credit score and how many points to the positive and negative each transaction will impact your score.

It is helpful to understand what factors are considered when a credit score is determined, these are: Amounts of credit owed, payment history, length of credit history, types of credit in use and new credit and recently opened accounts.

Possible reasons for Poor Credit Scores

Late or Missed Payments

35% of your credit score is based on payment history. How long accounts are past due and the number of items that are past due on your credit file will have an impact on your final credit score.

Using in excess of 80% of your Available Credit

30% of your credit score is centred on amounts owed, this takes into consideration the total number of accounts with balances remaining and the percentage of total credit limits that have been used.

Having a Limited Credit History

15% of your credit history is based on the length of credit history. Younger people will typically have lower credit scores than those who are older even when all other factors are the same due to the limited length of credit history.

Too Many New Lines of Credit Requested

10% of your overall credit score is based on new credit. Therefore, the number of recently opened accounts, the number of recent credit enquiries and the duration since these new accounts or credit enquiries have been made will have an impact on your credit score. Individuals can however check their own credit scores without the risk of affecting their scores, whilst companies that inquire before sending promotional notices will also not have an impact on the score.

Only Using One Type of Credit

10% of your credit score is based on the types of credit that are used. It is beneficial to your credit score to have more than one type of credit on your file as it gives the indication that you are an experienced borrower.

Advice for Improving your Credit Score Rating

You may be unfortunate enough on occasions to find yourself being refused credit due to any of the reasons outlined above, however it is possible to rebuild your credit score, here are some factors to consider:

Check Your Files Annually or Before and Major Credit Applications

Before making any major credit applications it is important to ensure your accounts are in order, it is also important to keep an eye on this on a regular basis to ensure items are not forgotten about.

Register to Vote

Being on the electoral role enhances your credit score, giving finance lenders easier access to proof of address.

Don’t Miss or Make Any Late Credit Repayments

The importance of this has been outlined above, however even if a payment is late always try to make that repayment, being in default will have a larger impact on your credit score than just missing a payment.

Don’t Get Bad Credit by Association

Don’t let a partner or flatmate with a poor credit score have an impact on yours. You can get poor credit by association so keep your finances separate from those with poor scores.

Minimise Credit Applications

Free eligibility calculators online are handy tools to use rather than filling in endless credit applications.

Use a Credit Rebuild Card

Using a credit card can help to restore past issues and rebuild your credit history, providing payments are made in due time.

Refrain from Withdrawing Cash from Credit Cards

If you need to withdraw cash, try to withdraw from a debit account.

Use Consistent Personal Details

Avoid being declined credit due to suspicions of fraud by using consistent personal details when filling in credit applications.

Cancel Credit Cards or Store Cards that are no longer in use

Accounts that are still active but you no longer use can show up on your credit file, simply cancel any credit cards or store cards that you no longer need to stop them having an impact on your credit score.

If Possible Pay Insurance in a ‘Lump Sum’

If it is possible pay for insurance in one lump sum to avoid undergoing a ‘hard’ credit check which will affect your credit score.

Have a Consistent Address

Staying in the same address will benefit your credit score, so try to avoid moving home on a regular basis.

Older Credit Accounts

These accounts will positively impact your credit score and see you viewed as less of a potential risk to lenders.

Keep Your Credit Limit Usage below 50%

As mentioned previously, using more than 80% of available credit can have a significantly negative impact on your credit score, try to keep this below the 50% mark if possible.