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CREDIT SCORING

What is 'Credit Scoring'?

Credit scoring is a numeric expression performed by lenders to assess the risk of loaning money to a person. A person’s credit score is provided to lenders by the three major credit reporting agencies, including Equifax, Experian and TransUnion.

We use credit scoring, among other things, to decide on whether to extend or deny credit. The lower the credit score the riskier it is to make a deal with the borrower. Though, no-one has a universal credit score.

Minimum and maximum credit scores are dependent on what credit reference agency is being used to calculate a score, e.g. the maximum score for Equifax is 700, Experian is 999, and TransUnion 850). This highlights the complicity of credit scoring – there are no set guidelines to tell you how many credit points are lost and won with every financial movement you make.

Though, it is helpful to understand what factors are considered when determining a person’s credit score.

The five factors considered when determining a person’s credit score are:

  • payment history
  • amounts owed
  • length of credit history
  • new credit and recently opened accounts
  • types of credit in use

Reasons behind Bad Credit Scores

 

Missed/Late Payments

35% of your score is based on payment history. The length of time accounts are past due, and the number of past due items on file will affect your final credit score.

Using More than 80% of Available Credit

30% of your credit score is based on amounts owed, this considers the number of accounts with balances and the proportion of total credit limits that has been used.

Having a Short Credit History

The length of a person’s credit history is used in the calculation of your credit score, and counts for 15% of the overall score. Typically, those younger will have a lower credit score than those who are older, even when all other factors are the same.

Too Many Requests for New Lines of Credit

10% of your credit score is based on new credit. The number or recently opened accounts, the number of recent credit enquiries and the length of time since these new accounts or credit enquiries have been made will all effect your credit score. Though, individuals can check their own credit scores without risk of damaging the score, and companies that make inquiries before sending promotional notices will not impact the score.

Using Only One Type of Credit

10% of the FICO score is based on the types of credit that are used. It is beneficial to have more than one type of credit as it indicates the individual is an experienced borrower.

Top Tips to Improve your Credit Score Rating

Sometimes you may find yourself being denied of credit due to the reasons above, but don’t be disheartened – it is possible to rebuild your credit score. Here are some of our top tips to boost your credit score rating:

  • Check your files annually or before any major applications
  • Register to vote! – Being on the electoral role boosts your credit scoring as it gives lenders easier access to proof of residency
  • Don’t miss / make any late credit repayments
  • Always try to make a repayment even if it is late – being in default will have a bigger impact on your score than just missing
    a payment.
  • Don’t let your partners or flatmates score ruin your score – keep your finances separate to those with bad credit scores
  • Minimize credit applications by using free eligibility calculators
  • Use a credit rebuild card to build a credit history and restore past issues
  • Don’t withdraw cash form credit cards
  • Use consistent personal details when filling in credit applications to avoid being declined due to suspicions of fraud
  • Cancel unused credit / store cards
  • If possible, pay a lump sum for insurance rather than monthly payments to avoid a ‘hard’ credit check which will affect your score.
  • Having a consistent address will be beneficial for your credit score, so try to avoid moving between properties frequently.
  • Older credit accounts will help your score and make you more appealing to lenders
  • Try to keep your credit limit usage below 50%