Credit Scoring

This is a statistical technique, used by most lenders, for automatically assessing whether you're likely to be a good or a bad credit risk. Different insurers try to put you into different risk categories for car or life insurance.

Credit scoring systems are usually computer models developed by specialist firms and sold to lenders. The systems use data about loans that have been made in the past to work out which characteristics of the borrowers tend to be attributes of good borrowers and which of bad ones. The characteristics are given a score; different lenders use different systems, but generally a high score means the characteristic is associated with a good lending risk and a low score with a bad risk. When you apply for a loan, you'll be asked for various personal details. These will be scored in the same way and added together to give a total. If your total score is above a certain level, you'll automatically be granted credit or given the loan. If it's below another level, you'll automatically be refused. In between, there's a grey area where the lender will have to investigate further before deciding whether or not to lend to you.

Nowadays, credit scoring systems are quite complex and virtually all include information provided by credit reference agencies which might account for the largest part of your 'score'. But the following very simplified example shows how a system might work.

The credit scoring system will also take account of other factors such as, the geographical area in which you live, your income, and possibly the number of credit cards held and other loans outstanding. A report from a credit reference agency will be an important item.

It would be unusual for any one item making up the credit score to cause a rejection of your loan application - more likely, it would be because of a combination of items plus a bad report from a credit reference agency. For example, a 24-year-old in an unskilled job living in an inner city rented flat who got into difficulties repaying a loan four years ago, while a student, might find their loan application rejected out of hand. But different lenders use different scoring systems, so even if you've been rejected by one lender, you might be accepted by another.

A good credit scoring system should reduce the risk of your application being turned down on purely arbitrary grounds, and it should help to speed up the handling of applications so you may get a loan faster. But the problem with statistical systems such as these is that they tell the lender only about averages. You may share a number of characteristics with people who are in a bad debt category but you might still be a very sound borrower. For example, the 24-year-old above. might be about to start a new and much better paid job with excellent career prospects.

TIP - Volunteer extra information to a lender if you think that it might improve your chances of getting a loan. If you're still turned down, ask the company why. They aren't obliged to tell you anything, except - if you ask - whether they obtained a report from a credit reference agency.


Read more about Credit Scoring

Basic Rules

- If you can't meet your current spending (shopping, mortgage payments, fuel bills, and so on) out of your available income, don't borrow. Trying to repay the loan will only exacerbate the situation. Instead look at ways of cutting back on spending, or ad... see: Basic Rules


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