Understanding credit scoring

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Q. How do loan companies decide to give credit? A few years ago I had money troubles and I am worried this will affect my loan application.

When you apply for a loan or other type of credit, such as a credit card, the lender has to decide whether or not to lend to you.

Credit scoring is a system used by the creditors to decide on the risks. When you apply for credit, you complete an application form which tells the lender lots of things about you. Each fact about you is given points. All the points are added together to give a score. The higher your score, the more credit worthy you are.

Different lenders use different systems for working out your score. They won’t tell you what your score is but if you ask them, they must tell you which credit reference agency they used to get the information about you. You can then check whether the information they used is right.

What information is kept by credit reference 

Credit reference agencies are companies which are allowed to collect and keep information about consumers’ borrowing and financial behaviour. When you apply for credit or a loan, you sign an application form which gives the lender permission to check the information on your credit reference file.

There are three credit reference agencies – Experian, Equifax and CallCredit. All credit reference agencies keep information about you and a lender can consult one or more of them when making a decision.

Credit reference agencies keep the following information:

The Electoral Roll: This shows addresses you’ve been registered to vote at and the dates you were registered there

Public records: This includes court judgments, bankruptcies, IVAs, Debt Relief Orders and Administration Orders.

Account information: This shows how you have managed your existing accounts. It shows lenders whether you have made payments on time.

Financial associations: This shows details of people you are financially connected to.

Previous searches: This shows details of companies and organisations that have looked at information on your file in the last 12 months

Linked addresses: This shows any addresses you have lived at.

If there has been any fraud against you, for example if someone has used your identity, there may be a marker against your name to protect you. You will be able to see this on your credit file.

Information about you is usually held on your file for six years. Some information may be held for longer, for example, where a court has ordered that a bankruptcy restrictions order should last more than six years.

How to get a copy of your credit reference file

You can ask for a copy of your credit reference file from any of the credit reference agencies, a £2.00 fee is required.

Credit reference agencies may offer other more expensive services where you are sent a copy of your credit reference file on a regular basis. If you are thinking about signing up to this kind of service, make sure you read the details about what it will provide and check it’s what you want before agreeing to it.

What to do if information on a credit reference file is wrong

If you think any of the information held on your credit reference file is wrong, you can write to the credit reference agencies and ask for it to be changed. But you can’t ask for something to be changed just because you don’t want lenders to see it.

You can also add information about your situation. For example, you can add information if you have had a past debt but have now paid it off. This is called a notice of correction. This might help you if you apply for credit in the future.

Can you still get credit if you have a low score?

If you have a low credit score, a lender may ask for a guarantor. A guarantor is a second person who signs a credit agreement to say they will repay the money if you don’t. This can be a way you can borrow money or get credit when on your own you might not be able to.

If you are thinking about agreeing to be a guarantor for someone else, make sure you understand what you are agreeing to. Read all the small print in the agreement before signing it.

For further help get free, confidential and independent advice from Citizens Advice at www.citizensadvice.co.uk or for further information go to www.citizensadvice.org.uk/nireland