Money Advice, Debt Advice & Debt Help
How is your credit rating calculated?
Money Advice, Debt Advice & Debt Help

How is your credit rating calculated?

The idea that everyone has a numerical “credit score” or rating which can actually be defined as good or bad is a misconception. There is actually no such thing as a numerical credit rating which is used to determine whether or not an application you make for any type of credit will be accepted.

Each lender will accept or reject your application for credit based on a number of criteria which are unique to themselves. Having said that one of the most important things they will use to make their lending decision is the information available on your credit file. Via this file they have access to information about the history of payments towards any credit facilities you currently have, records of insolvency proceedings and other things such as whether you are registered on the electoral role.

Their decision to lend will be heavily influenced by things such as your payment history associated with other forms of credit that you currently have. They will also take into account whether or not any default notices or CCJs have been issued against you and of course whether you are currently subject to any insolvency proceedings such as an IVA or Bankruptcy.

BMD Tip: Lenders who interrogate your credit file as part of their credit checking procedure are generally not given specific information about who you have currently borrowed money from, the outstanding balances or monthly repayment amounts.

Different lenders have different lending policies

If you are trying to understand whether or not you might be accepted for credit by a particular lender or why a recent application you have made has been rejected it is important to remember  that different lenders operate different lending practices and act on the information in your credit file in different ways.

Each different lender will normally compare the information they get from your credit file to their specific lending criteria. If you match their criteria for success then it is likely that credit will be offered. If your score does not match their lending criteria it is likely that your application will be rejected.

Some lenders have a high threshold for risk and may not accept your application if you have any traces of credit problems. Other lenders just may not be in the lending “mood”. However if a creditor is in the midst of launching a new credit product or they simply lend to people with poorer credit histories they may accept your application where others would reject it.

BMD Tip: If you are applying for credit from a lender who is willing to lend to people with a poor credit rating such as a payday or doorstep lender then you must beware of the interest you are likely to be charged on the money you borrow. These types of lenders will normally charge far higher interest than the typical high street rates.

Your credit file is not the only basis for lending decisions

It is important to understand that your history of taking and repaying credit is NOT the only criteria used by potential lenders when making a decision about whether to offer you a new credit agreement. Lenders also use additional criteria such as how long you have lived at your current address and whether you are a home owner etc. However if your credit repayment history is good there is no doubt that this will be a significant advantage.