Credit Rating : Calculating the Score

If you have ever applied for any kind of credit, there is no doubt you'll have heard of the term "credit scoring". You probably know that it's connected to your credit record but are you aware that there is a real science behind it with the score essentially determining whether you will be approved for credit?

Effectively, when you fill out an application to borrow money, any lender you contact will evaluate your financial record and any current commitments to know the degree of financial risk you bring and whether you can afford your repayments. These details are outlined in your credit record.

Your credit file is kept by a credit reference agency - of which there are two main ones: Equifax and Experian - and the selected creditor will rate your information to find out whether you meet their loan criteria. Your score can rank from 300 to 900 and will assist a lender in making their decision to lend you the money or not.

Typically, 15% of the rating relates to the length of time you've had credit. The longer the period of time that you have been using credit, the more substantial a payment history you will have.

35% is derived from your payment history. This looks at whether you meet your financial obligations promptly; the number of instalments you have neglected, etc. A key thing to be aware of is that if you have neglected or have made late payments recently, it will impact your scoring more negatively than if it was further back. When you have had quite a few inquiries on your report, this will also produce a more adverse result.

10% of your rating is based on credit inquiries and if you have made lots of credit applications, then it will appear as if you have financial problems.

10% of your scoring also relates to current lending where your present credit accounts are checked. This is particularly useful if the rest of your report does not hold a great deal of information. There isn't a suitable or unsuitable quantity of accounts to have.

Finally, 30% of the score relates to your outstanding debt. Any potential loan company must be sure that you can make your monthly obligations without difficulty, as well as making sure that you are free from financial pressure. Keeping any card balances below 25% of their credit limit will help your rating.

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