how is your credit score calculated?

If you have ever applied for any sort of finance, then a lender is likely to have calculated your credit score when deciding whether to accept your application.

Whether it’s a credit card, a mortgage, car finance or a personal loan, lenders use a credit score to decide whether or not to lend to you. But how is your credit score calculated?

We look at why each lender treats you differently, and how monitoring your credit report can help you to get the finance you need.

What is credit scoring?

Every time you apply for finance, lenders use a process called ‘credit scoring’. Here, they use all the information they have when you apply for credit to decide whether you’re the type of borrower they want to take on.

When deciding whether to lend, a bank, building society or credit house will look at:

• Your credit report.
• Any past behaviour with the lender (for example if you have previously taken out a financial product with them).
• Information you supplied as part of your application, such as your address and employment history, your income, your residential status, and any savings/investments you have.

Using this information, a lender will apply a mathematical model to calculate a ‘score’ that represents your creditworthiness. This ‘score’ helps to indicate what kind of borrower you are, and how likely it is that you will successfully maintain your repayments.

The key issue to remember is that you don’t have a single credit score. As each lender has their own policy, your credit score will be different from lender to lender. For example, some lenders assign a higher weighting to your employment history.

What this means is that if you don’t meet the criteria of one lender, you may still be accepted for credit elsewhere.

Lenders are generally secretive about how their credit scoring works, and how they arrive at an individual ‘score’. However, if you are refused for credit they may let you know why you were turned down. This helps you to deal with any issues before you make another application. We’ve put together a list of 10 questions to ask your lender, to ensure you understand and are prepared for the financial commitment you are making.

What factors affect your credit score?

Credit scoring criteria differs from lender to lender. However, your credit score is generally based on:
• How much of your available credit you’re using.
• Your total debts.
• Your payment history.
• Public records information, such as registration on the electoral roll.
• Whether you have any county court judgments (CCJs) or defaults.
• The amount of credit searches that have been done.
• Financial associations – anyone that you have had a joint credit agreement with in the past.

Getting a ‘score’ from a credit reference agency

While your credit score will differ from lender to lender, it is possible to monitor your creditworthiness through a ‘rating’ given to you by a credit reference agency.

Credit reference agencies each give a customer a ‘score’ as a guide to help them understand how all the information in their credit report might be interpreted by the lender. While this ‘score’ is irrelevant to an individual lender, it is a useful tool for helping you to manage and improve your credit rating.

Generally speaking, the higher this ‘score’, the lower the risk you pose to a lender.

Credit reference agencies such as Equifax and Experian let you monitor your personal rating. They can provide advice as to how you increase your rating – making it more likely that you will get credit – as well as helping you to manage your credit file.

Ensuring you have a good credit rating not only has an impact on whether a lender will agree your finance. It could also determine the interest rate that you pay. If you are seen as a low-risk borrower, then you may pay a lower rate of interest on any finance you take out.