Credit Scores Explained

From the interest rate you get on a loan to whether or not you can qualify for a credit card - credit scores can make a huge difference to our lives. So how are they calculated and how can you improve your rating?

How are credit scores calculated?

It's a common misconception that there are universal credit ratings or blacklists when in fact scoring systems are different depending on the lender and the product. However, while each lender scores differently, the information they use is typically similar:

- The application form: Lenders use this to gain information about your postcode, salary, whether you're a home owner and the reason for wanting the loan.

- Past dealings: If you have dealt with a company previously then this information is often used to assess your behaviour.

- Credit reference agency files: Experian, Equifax and Callcredit compile data that allows them to send information on any individual in the UK to a prospective lender. The data comes from five main sources: your account data, from banks, building societies and other sources based on your payments/transactions on cards, loans, mortgages, bank accounts and mobile phone contracts; fraud data - whether or not you have committed fraud; search, address and linked data - records of other lenders that have searched your file when you have applied for credit; court records, indicating any past history of debt problems, county court judgements and bankruptcies; and electoral roll information.

Based on this information, lenders use different scoring models to calculate a 'credit score'. As each lender has their own scoring system there is no guarantee that just because you can get a loan with one provider you can get a loan from another.

How can you improve your credit rating?

Unfortunately, credit scores don't just penalise those that have 'bad' ratings, but also those who have no credit rating which can make it particularly difficult for young people to have applications approved.

However, there are ways of improving your credit rating, such as:

- Cancel unused cards: If there are any credit cards, debts and accounts you no longer use then make sure they are cancelled.

- Get on the electoral roll: Enter your postcode to search for your local council, then complete the online form and send it back to your local electoral registration office.

- Stability: Homeowners and those in steady employment are more likely to be accepted.

- Build a good history/repair old problems: If you have no credit history you should attempt to build a good one by getting any type of credit and operating it correctly. This may mean applying for a 'bad credit' credit card with a high rate of interest, as long as you are sure you will use it wisely and pay it off each month.

- Keep up with payments: Ensure you keep up with payments, not just on credit cards and loans but also on household bills. At least try to meet the minimum repayment on all of your financial products, even when money is tight as missing payments even once or twice could cause problems for years. Set up direct debit payments too, to ensure you pay on time.

- Time applications: Don't be tempted to apply for a barrage of credit all at once - space out applications for everything from mobile phone contracts to car insurance as all could leave searches on your file.

- Don't let rejections spiral: Don't apply, get rejected, apply somewhere else and get rejected again. Check your file, amend errors and aim to boost your rating before you apply for credit cards again.

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