What is credit scoring?

When you apply for a credit card, personal loan or mortgage, or any other form of credit, it is usual for the lender to 'credit score' your application. Credit scoring is the system lenders use to automatically assess whether you are likely to repay a debt and works by awarding 'points', depending on the answers you give to the questions on the application form. The questions are designed to help the lender to assess your creditworthiness, that is whether or not you are likely to repay the debt. Through credit scoring the lender tries to predict how big a risk it is taking by allowing you to borrow up to a certain limit.

If your total score reaches a set level, then you 'pass' the credit score and your application for credit is likely to be accepted. If you don't score enough points, the lender may:

decline your application; or,
offer to lend you a smaller amount than you applied for; or,
charge you a higher rate of interest higher than the promotional rates advertised.

Different lenders use different criteria to decide whether to grant you a credit card, mortgage or personal loan. A poor credit score with one institution doesn't mean a low score with all of them. Some lenders accept applications from people who have been turned down by other organisations because they employ a different method of credit scoring.

The method of scoring is fairly straightforward. If, for instance, you have a highly paid job with good career prospects, you will score higher marks than a part time freelancer, while using the same bank for 10 years will gain more points than having an account for just one year. You will also score well if you have spent a lot of time at your current address. Anything more than three years scores well, anything less doesn't attract so many marks.

As well as credit scoring your application, the lender will also carry out a credit reference check by using a credit reference agency to look at your credit file. A good credit history will help your application.

Financial products suitable for people with low credit scores