FOOL'S EYE VIEW
Are You a Good Credit Risk?

By Jane Mack (TMFJane)
May 9, 2001

"I recently applied for an RBS Advanta card and to my surprise was refused. I say surprise because my current credit card companies (Barclaycard and Egg) are always increasing my credit limit and in the case of Barclaycard, I have recently been sent a gold card which I never requested. I applied for the RBS card over the internet and used an address that I have just moved into rather than the address of my current cards - could this be the problem?"

The question above is typical of one we often see on our discussion boards. Why is one organisation prepared to lend you money but another isn't?

In general, the answer lies in the credit scoring system adopted by each provider. Whenever you apply for a credit card, personal loan or mortgage, the prospective lender will run a credit check on you through one of the two main credit reference agencies: Experian and Equifax.

Between them the two agencies hold details on some 44 million people in the UK. Your file includes information about your other credit cards, your mortgage, your bank accounts as well as facts and figures on any unpaid bills, failure to pay hire-purchase debts and County Court Judgements.

It depends entirely on the credit provider as to the amount of risk they are prepared to take, so varying degrees of importance are attached to the information gathered from the credit reference agency and from your application form. It works on a points system, and the more points you get, the more likely it is that the provider will lend you money. However, while one provider may give you 40 points for being married, another may not give you any points at all. It depends on the provider's target market: a provider targeting students wouldn't expect many of them to be married.
 
A lender's individual credit scoring system is commercially sensitive information so it's sometimes difficult to find out exactly why you might have been turned down for a credit card or loan. However, the National Consumer Council has come up with a sample credit score card which might give you an idea of how it works. Here are a few examples:

Years in present employment     Points

0-5                                0
6-10                             +15
11-12                            +30
Over 12                          +50

Marital status                  Points

Divorced                           0
Widowed                          +10
Married                          +40
Single                           +12

Age                             Points

21-25                              0
26-30                             +5
31-39                            +40
40-59                            +55
60+                              +42

Number of children              Points

None                             +30
1                                +15
2                                 +5
3+                                 0

Age of most recent bad debt     Points

No debts                          +5
Less than 3 months               -35
3-12 months                      -30
1-2 years                        -27
2-3 years                        -15

Telephone                       Points

Yes                              +20
No                               -30
Not answered                       0

It's interesting, isn't it, how you get penalised for being divorced or for not having a phone? And why is a 24-year-old considered less responsible than a 34-year-old?

Other criteria include how long you've lived at a particular address (the longer the better) and whether or not you're on the electoral roll. Your postcode is also relevant because it indicates whether you live in an affluent area or not, and your profession counts too.

One very important factor is the number of applications for credit you've made. This is registered on your file and it counts against you if you've been applying for credit willy-nilly over a short period of time. It's far better to find out why a lender has turned you down in the first place instead of just applying somewhere else, just in case it's something you can rectify. Your credit file can also contain mistakes and, as you're allowed to correct any factual errors, it makes sense to obtain a copy of your file to check it. You're also allowed to add a brief statement to your file to explain a problem that might usually count against you, for example, why you briefly fell behind with your mortgage payments six months previously. There may be a good reason which would help the lender to make a more informed decision.

You can find out more from Experian and Equifax. They don't hold exactly the same information so it's worth getting copies of both. It'll cost you £2 for each file.

More: The Fool's Get out of Debt Centre