Credit Scoring

What is Credit Scoring?

Credit scoring is performed by finance lenders to assess the risk of offering credit or loaning a sum of money to an individual, couple or business. Credit scoring takes the form of a numeric expression, with an individual’s credit score provided to finance lenders by three major agencies who focus on credit reporting: TransUnion, Equifax and Experian.

Why is Credit Scoring used?

Credit scoring is used amongst other factors to determine whether to extend or deny credit once a credit application has been made. A lower credit score means that it is a higher risk to enter into a contract with the borrower, however no individual has a universal credit score and this score will differ depending on which credit reference agency is used to calculate your credit score.

Minimum and Maximum Credit Scores

Minimum and maximum credit scores are dependent on which agency you use. For example the maximum credit score for Equifax is 700, whereas is it 850 for TransUnion and 999 for Experian. This outlines how complicated credit scoring really is, as there are no set guidelines to outline to you how each financial movement you make will affect your credit score and how many points to the positive and negative each transaction will impact your score.

It is helpful to understand what factors are considered when a credit score is determined, these are: Amounts of credit owed, payment history, length of credit history, types of credit in use and new credit and recently opened accounts.

Possible reasons for Poor Credit Scores

Late or Missed Payments

35% of your credit score is based on payment history. How long accounts are past due and the number of items that are past due on your credit file will have an impact on your final credit score.

Using in excess of 80% of your Available Credit

30% of your credit score is centred on amounts owed, this takes into consideration the total number of accounts with balances remaining and the percentage of total credit limits that have been used.

Having a Limited Credit History

15% of your credit history is based on the length of credit history. Younger people will typically have lower credit scores than those who are older even when all other factors are the same due to the limited length of credit history.

Too Many New Lines of Credit Requested

10% of your overall credit score is based on new credit. Therefore, the number of recently opened accounts, the number of recent credit enquiries and the duration since these new accounts or credit enquiries have been made will have an impact on your credit score. Individuals can however check their own credit scores without the risk of affecting their scores, whilst companies that inquire before sending promotional notices will also not have an impact on the score.

Only Using One Type of Credit

10% of your credit score is based on the types of credit that are used. It is beneficial to your credit score to have more than one type of credit on your file as it gives the indication that you are an experienced borrower.

Advice for Improving your Credit Score Rating

You may be unfortunate enough on occasions to find yourself being refused credit due to any of the reasons outlined above, however it is possible to rebuild your credit score, here are some factors to consider:

  • Check Your Files Annually or Before and Major Credit Applications
  • Register to Vote
  • Don’t Get Bad Credit by Association
  • Minimise Credit Applications
  • Use a Credit Rebuild Card
  • Refrain from Withdrawing Cash from Credit Cards
  • Use Consistent Personal Details
  • Cancel Credit Cards or Store Cards that are no longer in use
  • If Possible Pay Insurance in a ‘Lump Sum’
  • Have a Consistent Address
  • Older Credit Accounts
  • Keep Your Credit Limit Usage below 50%