FOOL'S EYE VIEW
How Credit Scoring Works

By Jane Mack (TMFJane)
June 19, 2003

Recently a friend of mine decided to sell up and buy a smaller house because it meant she wouldn't have to have a mortgage. I think they call it 'downshifting' these days.

Anyway, the house she bought needed a fair bit of work doing to it so she set about looking for a £15,000 loan over three years. And couldn't find one.

Her first port of call said she'd have to borrow more and over a longer period while the second wouldn't lend at all. In the end, she had to borrow it from her own bank but it was over a slightly longer term, which was fixed so she wouldn't be allowed to pay it off early.

The fact is her credit rating was too good because she'd paid off her mortgage!

Lenders aren't just cautious about lending to people with a bad credit rating. You could be rejected for a loan or a credit card simply because you're too good at paying off your debts and that may not be profitable enough for them. It's also why some lenders use your credit score to determine the interest rate you're charged. If you apply for a loan that claims to offer a 'typical APR of X' and find that you're required to pay more, it'll either be because you're bad risk or too good a risk.

Lenders base their decisions on the information provided by the two main credit reference agencies - Equifax and Experian - and you have a right to see the information they have on your file. It's worth applying to see your credit file on a regular basis – perhaps once every couple of years or so – to ensure there aren't any errors.

If you have incurred defaults and are struggling with debt because of, say, redundancy or divorce, you can add a brief 'Notice of Correction' to your file to explain your circumstances so that prospective lenders can take your reasons into account when checking you out.

Each lender has different criteria when calculating your credit score. It depends on their target market and whether they want to encourage or discourage people like you. It works on a points system: the more points you get, the more likely it is that you'll get credit. See the following example of a credit score:

Years in present employment      Points 

0-5                                   0
6-10                                +15
11-12                               +30
13 or over                          +50

Marital status 

Divorced                              0
Widowed                             +10
Single                              +12
Married                             +40

Age 

21-25                                 0

26-30                                +5
31-39                               +40
40-59                               +55
60 or over                          +42

Number of Children 

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

Age of most recent bad debt 

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

Note that the moment you hit 60 your credit rating starts to drop and that children can be regarded as a liability!

An important factor is the number of applications for credit you've made. These are registered on your file so if you've made several applications over a short period of time, it could count against you. So be choosy about who you apply to and then phone them to find out if you're likely to be accepted before they run a check on you and then apply formally.

Other criteria include whether or not you're on the electoral roll and what your profession is. The length of time you've lived at a particular address also matters – the longer the better – and this may have been why my friend found it difficult getting the loan she wanted. She'd only just moved.

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