Credit scoring
Find out what credit scoring is and what to do if you are turned down for credit.
What is credit scoring?
When you apply for a credit card or current account or to borrow money, the lender will usually credit score your application. This helps the lender decide whether to accept your application and, where relevant, helps set your credit limit and interest rate.
Credit scoring works by awarding points to the information you provide on your application form and to the information recorded on your credit report (held by a credit reference agency). Lenders often use all this information to try to predict how big a risk they are taking by allowing you to borrow money and whether you can afford to repay it. It helps them decide:
- whether to give you a credit card or loan;
- what credit limit to give you; and
- what interest rate to charge.
If you don't score enough points to reach the lender’s pass mark, the lender may:
- turn down your application;
- offer to lend you a smaller amount than you were hoping for; or
- charge you a higher rate of interest.
Each lender has their own scoring system, but you’ll generally score more points the longer you’ve been in a job; if you own your own home and/or have lived for a while at the same address; if you’re middle aged rather than younger or older; and if you’re married. However, you certainly don’t have to be all of these things to apply for a loan.
The information on your credit report is very important and having a good credit history will improve your chances of getting credit. Someone who has had a loan or credit card and makes all the payments on time may score more points than someone who’s new to borrowing. On the other hand, it can count against you if you already have several loans and credit cards, or if you’ve made lots of different applications recently. So be careful not to apply for credit until you have decided on the best deal.
When you’re shopping around, lenders may want to check your credit report before giving you a quote for the cost of credit. Make sure you ask the lender to make a ‘quotation search’ instead of a ‘credit application search’. Lenders know that quotation searches do not represent actual credit applications, so they won’t harm your credit score in the future.
If you’re not on the Electoral Roll the lender might refuse your application. This is because lenders use it to confirm your name and address.
What if they turn you down?
Lenders won’t go into detail about how their scoring systems work, but if you are refused credit you can ask them to tell you the main reason – which could be because of credit scoring or because of information on your credit report. They have to tell you the name of any credit reference agencies they used.
For more information on how your credit report works, and how to get a copy of your report, see Credit reference agencies.