You’ve heard of Credit Scoring - but what is it?

When a lender such as a bank or another finance body lends money directly to a person or business, they first have to ultimately establish the feasibility in the worthiness of the borrower(s) in their ability to pay back. For such lenders to establish this they will run all funding/loan applications through a process called credit scoring.

So exactly just how does credit scoring work?

Credit scoring not only takes into account the information which is provided by the borrower (i.e. you) but also any information that the lender holds about you through any current or previous dealings. It is important to note that they also can access any / all information held about the borrower from a licensed centralised point which is called a Credit Reference Agency.

The credit scoring system allocates points for each piece of relevant information and adds these up to able to produce a score, which when hitting a certain point will allow lenders to agree on some / all loan or funding applications, If not hitting the certain points score could / would ultimately mean that such a loan or funding application would be rejected and dependent on any further discussions and information provided as to the purpose and its use may or may not see further consideration in fulfilling the loan/funding request.

The points which make up the credit score are allocated based on a thorough analysis of large numbers of repayment histories over many years of providing credit. The statistical analysis enables lenders to identify characteristics that predict future performance – an example being that individuals/businesses that have county court judgements registered in their name have proved to be less likely to meet payments than those without judgements.

Credit scoring produces consistent decisions and is designed to ensure all loan applicants are treated fairly, additionally, lenders will also have their own policy rules to allow them to determine whether they will lend or not. An example here is that such policies reflect a lender's commercial experience and requirements – i.e. if they have direct evidence that an application has shown poor management of credit products in the past they may decline the loan request.

For a bank, every application to open a bank account or borrow money involves a certain amount of repayment risk for the bank, no matter how responsible or reliable the applicant is. Here credit scoring allows them to calculate the level of risk for each application based on the information they have and/or obtained. Here the same is said that if the risk level of acceptability is exceeded they will not proceed/accept the application.

The decline of an application does not necessarily mean the applicant is a bad payer. It just means that based on the information available at that time the bank/lender is not prepared to take the risk in opening a bank account or awarding a loan/funding.

Although everyday stresses and strains may make you think otherwise, it's best to remember that - Lenders are not obliged to accept an application.

Lenders have different lending policies as well as scoring systems so the application of the same to each may be accessed differently. Therefore this could result in one lender accepting the application whilst another may not.

Also important to note is that: - should an application be declined the general rule of thumb is not to disclose this to the Credit Reference Agency although the evidence of a credit score assessment being made for the application may be present. Too many credit score assessments within a short amount of time can also harm your credit score.