Demystifying the credit scoring process

Credit scoring or credit history can often be quite confusing. Many people do not fully understand why this is in place or perhaps how this can affect them. We will attempt to give some further information on credit scoring, answering some of the common questions that come up.

Why finance companies use credit scoring

Lending money is primarily about risk for the credit companies, whatever the loan be it for a mortgage, credit card, secured or unsecured loan. Obviously lenders only want to deal and lend money to people whom they think will pay back the finances lent to them. But how do they decide who is acceptable and who is not? – this comes down to credit scoring or your credit history.

Simply put, the finance company will run background checks on how you have dealt with credit in the past. This data is held on file by credit reference agencies, often for a period of three years. The lender will look at this information to make an assessment, deciding whether or not to provide financial services.

The data held on file will include some of the following: past applications for credit (even if you have not been successful in obtaining the finance), balances you currently have, balances you may have paid off in the past and payments you may have missed in the past.

What they are looking for is evidence that if they lend to you, the finance will be paid back regularly, responsibly and without any problems. To make that judgment your past history comes into play, the history been seen as the best possible guide to the future actions and dealings with credit.

Positive features on your credit score

there can be a number of features on your credit score which are deemed as positive and will reflect well on you. These can include a current manageable number of finances (i.e not too many), and a good track record in having taken out finance and paid it back without missing any payments. If your current financial commitments are not too high, then your application will be seen as having very good potential to take out further credit without getting into difficulties. If you have paid back credit in the past then you are seen as being reliable. Both of these will be visible on your credit history and can enhance a positive ‘score’ if such a figure is calculated.

Bad / Adverse credit defined

adverse credit is when you have had problems in making payments for finance in the past and you have been unable to meet your commitments. This can consist of any of the following:

CCJ’s

this acronym stands for County Court Judgements. This occurs when a borrower has not paid a lender, and the lender has to take the borrower to court in order to reclaim the monies owed. Often the court will make a payment schedule after consulting the borrower with what they can afford to pay off per month. If the borrower does not then pay off with the court arranged schedule bailiffs can be called in to seize goods up to the value of the debt.

Arrears

these are basically missed payments that can accrue. Often a payment schedule can be arranged with the finance company without having to go to court, however this will still be noted down on your credit history.

How bad credit could affect you

basically if you have bad credit you can be seen as a risk and standard lenders may be reluctant to provide financial services. As such you could find yourself at a higher rate of interest with specialised lenders.