Lenders use credit scoring as a tool to decide whether to advance money or not. Most have there own credit scoring systems but will use much of the same information from a number of common sources. Credit scoring is used to determine how attractive you are as a customer and works out a mathematical probability that you will default on your commitments.Credit Scoring Explained
So what elements go into a credit score and how can you make sure that you are as attractive as possible to prospective lenders. Remember that the more attractive you look the better the rates and terms you will be offered on the loan so a little understanding and effort can save you money.
Everyone has a credit record. As soon as you start to open bank accounts or enter into mobile phone contracts a record of how you pay is registered and this information shared with a number of credit reference agencies. The more satisfactorily you perform on these obligations the better you score will be.
But whilst your payment experience on existing loan, utility, phone and bank accounts plays an important part mistakes by providers or genuine disputes you may have had with suppliers could affect your credit rating. Therefore, it is worth checking and correcting any payment history maintained under your name.
Credit reference agencies have a duty to maintain accurate records and to disclose what they hold to an enquirer. Most offer free trial use of the credit checking service where the information is presented in an easy to read and quick to check format. If you do not want to use their free trial then paying a £2 fee will get you a copy of the raw data.
If there are errors then this must be taken up with the original supplier. They will need to correct their records and resupply them to the credit reference agency.
But lenders also look at other factors when assessing a credit score. Whilst past payment experience will be heavily weighted in the final score other information can add or detract from the result.
Being a home owner scores well. It demonstrates stability and an asset that you are unlikely to easily walk away from. Tenants score less well since they can up and move easily. Either way, length of tenure in the same place scores significantly better than a short stay at an address. Lenders will also check the electoral register as a means of confirming both your identity and length of time at an address.
As can be evidenced - lender like stability of address in its prospective borrowers.
But as people have a credit score so do neighbourhoods. People with like characteristics tend to group together and if the locality has a high incidence of default then you will attract a negative rating. The converse is true so moving to a social neighbourhood with a better payment record will enhance your score.
Good, average and poor credit scores have a significant effect on the loans offered. Rates will be higher and payment periods shorter for higher perceived risk customers. Use the payment calculator on websites such as moneysupermarket.com to see the effect and determine to work hard on improving your credit score.
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