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Credit scoring is what lenders do when you apply for credit. The effect of credit scoring on consumers can be seriously detrimental to not only the individual but also the economy. Therefore it is important to know how it affects you as well as what measures can be taken to improve your credit score.
A credit score system will take into account your age, marital status, number of dependants, occupation details, length of employment, the loan to value percentage, loan purpose and the area in which you live.
Each lender uses a credit scoring system unique to them. Based on that system, your score is evaluated by compiling information garnered from your application as well as the ever-crucial credit report from a credit scoring company. Credit agencies, the two largest being Equifax and Experian provide credit reports to the lenders on request.
The credit report will document your credit ‘footprints’ where you have made late payments, missed payments altogether or have outstanding debt or CCJs (County Court Judgments) against you. It will also show instances where you have applied for credit in the past, successfully or unsuccessfully. It is based on this report your lender will evaluate your risk potential and will either:
1) Agree to offer you credit based on a well managed credit history
2) Agree credit but at a higher rate to compensate for an element of risk; or
3) Refuse you credit based on any number of mitigating factors in your credit history.
Credit scoring criteria will be influenced by any of the following:
Further on in this guide to credit ratings, we will explore ways in which you can improve your credit score. We will give tips on clean up a messy credit history and thereby reducing your risk profile.
However, not all ‘black marks’ on your credit report can be treated as easily as others. For example, bankruptcy and IVAs will be registered with credit agencies for 6 years or until the IVA or bankruptcy term has been completed. After this time you will still have to declare your previous history when applying for a mortgage.
Note: Be sure to send your ‘Order of Discharge’ to credit agencies when your bankruptcy is completed.
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