Monday, August 13, 2007

credit rating with our

deliberately mis-titled this article. Credit ratings don't actually exist, it's a myth. Each lender scores you individually based on its own wish-list for a perfect customer. This is a step-by-step guide to understanding how the system works, and checking and improving your score.

What is credit scoring?
It's about profits not risk
What they know about you
What they don't know about you
Check your files for free
What to check on your file
Manage & improve your credit score
Discuss/Other Articles

DON'T Beware the Blacklist!

What is credit scoring?

Get a loan, mortgage, credit card, contract mobile phone or even monthly car insurance and lenders score you to predict your likely behaviour. Scoring systems are never published and differ lender to lender and product to product. This means just because one company rejects you, it doesn't automatically mean another will.

Credit scoring doesn't just dictate what products you'll receive. Most personal loan rates are ‘typical', as the actual amount you'll pay vastly varies with your credit score. With credit cards you may get an entirely different product to the one applied for, if your score's too low for the sexy product you wanted.

Clearing up two big myths

Credit ratings and credit blacklists don't exist. There is no universal credit rating; no one-off judgment of your creditworthiness, nor is there a blacklist. It mightn't feel like that though as, while each lender scores differently, the information is similar, so a bad risk for one lender is often a bad risk for others too.

Lenders aren't obliged to dole out credit. Applications are aggregated into millions, and banks prefer to deny a few good quality applicants rather than overspend on personalised vetting procedures or accepting large numbers of unprofitable customers.

Credit scoring's about profit not risk

This is so important, let me make it as clear as I can.

"Even good risks can be rejected simply because they won't make the bank money!"

Credit scoring is about profit not risk. Of course risk plays a part, as those unlikely to repay are an immediate threat to profits. Yet rejection may happen to even the most solvent if they're unlikely to act in a way that'll make profit for lenders. The sooner we understand banks are there to make money, not help us, the better we can play the system.

Some sophisticated scoring examples that should help:

Credit card companies reject you for always repaying cards in full. The most profitable credit card customer is perpetually in debt, never defaulting, always paying just the minimum (see Danger Minimum Repayments article). Thus if you pay off in full every month, or always shift debt to 0% cards, you may be rejected for further credit.

Your score mightn't be for to the product you apply for. It's all about weeding out the customers least suitable for their business e.g. current accounts are often used to draw in new customers to sell them other products. So apply for a current account and you may be scored on how likely it is to flog you a mortgage.

What they know about you

There are three prime sources of information used for scores.

The application form. Here lenders obtain the crucial details of your salary, family size, reason for the loan and whether you're a home owner. Ensure you fill the forms in carefully; one slight slip, such as “£2,000” salary rather than “£20,000”, can immediately kibosh any application.

Past dealings with the company. Companies use any previous dealings with you to help assess your behaviour, though complicated data protection rules can limit which separate units of a company can communicate to each other.

Credit reference agency files. The three credit reference agencies Equifax, Experian and Callcredit compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. The agency data comes from:

Electoral roll information. This is publicly available and contains address and who lives with whom details.

Court Records. County Court Judgements (CCJs) and Bankruptcies indicate if you have a history of debt problems.

Financial Data. Banks, building societies and other financial organisations compile details of all your payments and transactions. Around 350 million records a month are tracked including ‘black data' which is details of any defaults, late payments or problems and ‘white data' which incorporates how you generally operate the account.

‘Black data’ has always been shared by financial companies but until last year ‘white data’ was only provided by some. Now all share the information, where they have customer consent, meaning that each now has access to all data about you from other organisations.

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