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Credit scores explained

When you apply for a personal loan or other type of borrowing such as a credit card or mortgage, lenders will assess each potential customer’s creditworthiness to establish firstly whether they should offer credit at all and, secondly, on what terms.

To do this, banks and other financial institutions typically work out every applicant’s credit score: this is then used to dictate how likely the individual is to be able to repay their loan and therefore how much money – if any – they should be advanced.

What actually is a credit score?

Your credit score is not a fixed number: it will vary from lender to lender, as they are likely to use different criteria to work out the score. And it will probably also change over time as your financial circumstances improve or worsen. Some lenders may give potential customers a score out of 1,000 or out of 100.

Each company will usually have a cut-off point below which they will not offer credit. It may also be that the best deals, with the highest lending limits and lowest interest rates, are reserved for applicants with especially high scores.

How your credit score is worked out

Perhaps the biggest factor that influences your credit score is your credit history or record. This is the collection of financial information related to you that is compiled by the UK’s credit-reference agencies, Callcredit, Equifax and Experian.

Your credit history shows what credit agreements you have entered into in the past as well as whether you have missed any repayments, paid late, or defaulted on any debts. Details of bankruptcies or county-court judgements are shown here, and the record also contains personal information such as where you live and who you live with.

But lenders don’t rely exclusively on your credit history to work out your credit score: they will also use the information given on your loan application, such as your income level and the type of work you do, as well perhaps as the reason why you want to borrow.

If you are already a customer of the lender in question, they will most likely use any existing data they have about you as well.

Good and bad credit scores

So what factors will give you a higher credit score? If you have a history of borrowing responsibly – taking on manageable debts and making repayments regularly or when they are due – you’ll have a better score. Any missed payments or defaults will have a negative impact.

It can also be a problem if you haven’t borrowed money in the past: some lenders may view this as a warning sign and mark you down, even though you have done nothing wrong.

Other factors could lead to a lower score: if you live at (and therefore make your loan application from) a different address to that given on your credit report, this could create problems. The same might apply if you work part-time or in a job that a lender views as particularly risky.

Checking your score

Lenders don’t usually divulge the criteria they use for compiling credit scores, but you can check your credit record with one of the firms mentioned above in advance of making any applications to see what state it is in. If there seems to be any mistakes, or if your address has not been updated following a move, now is the time to put matters right.

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