Credit scores: what's the secret formula?

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What's your credit score? And how do you end up with an excellent 970 or a dismal 655? For most people, the answer to both questions is that they have absolutely no idea. Yet when they come to apply for a mortgage, credit card or loan, suddenly the answers could mean the difference between buying the home of your dreams or languishing in rental property for the foreseeable future.

So it's worth understanding exactly what your score is all about.

Lender secret formula

The first thing to get straight is that you don't have a single definitive credit score. Instead you have a credit record which is kept by credit reference agencies like Experian.

Lenders will check this record. They will also get you to complete an application form - which may include things like your job and salary. They will put these two things together and then apply their own set of priorities about the kind of person they want to lend to, in order to produce a credit score.
No lender asks exactly the same questions or has exactly the same ideal customer, so your score will vary between lenders.

In an ideal world we would know the criteria that lenders use when credit scoring us - so we could be sure we meet their needs. However, the lenders keep these things top secret, so it's difficult to get to the bottom of the kinds of things that matter to them. Anecdotal evidence has led to claims that some lenders reject people who have a perfect credit score. There are also some organisations which have been said to exclude landlords or older customers or self-employed people. However, without access to the details from the lenders all this is pure conjecture, so we need to start with what we know: your credit record.

Your credit record

Credit reference agencies like Experian will have been automatically collecting your financial data since the day you first opened a bank account. Every month, everyone you have any kind of financial relationship with will update them on how that relationship is progressing. This will include everyone from utility companies to mobile phone firms you have a contract with, your current account, and any existing borrowing.

When you apply to see the record, they will simply pull together everything they have on you, and print it out as a list.

It will show your listing on the electoral roll - so if you're not listed anywhere you need to get on the roll. Lenders use this to establish your permanent address.

It will list any aliases (names you have been formerly known as) and associations. These are people you are financially linked to, which happens when you apply for a joint financial product.

Next comes details of any relevant court decisions. These include county court judgements - which is where the court establishes that you have an unpaid debt - plus bankruptcies and individual voluntary arrangements. These usually stay on your report for six years after the court decision.

The next set of figures is all the credit agreements you have. These will stay on your record until six months after you close the account. You will have full payments shown for the last 12 months, and then details of any late payments over the last six years.

There may also be details of how you have managed any accounts - such as whether you only ever repaid the minimum, any cash withdrawals you made, or the balance on your statement each month. Then there will be details of your current account - and whether there's any overdraft.

If you have been a victim of fraud, there may be a CIFAS warning on there to help lenders understand they need to be vigilant about applications in your name.

Searches

And finally, previous searches by other people you applied to for credit will also appear on your report. Lenders are interested in this, because a rush of applications may indicate a desperation - and some sort of financial problem. These searches will stay on your report for 12 months, so it's important not to do too many.

This is why Experian recommends that before you make any applications you do a 'soft search' on a price comparison site (which won't show on your credit history), and read the literature from the organisation which very roughly explains the kind of customer likely to be accepted.

You should check your credit report to see whether you are likely to qualify. You can also get a rough idea of your credit score (before the lender priorities are added into the mix) from the organisations that hold your credit record, like Experian.

They don't claim to be able to tell you exactly how each lender will score you, but they will provide an indication of how lenders may interpret your credit report. The score will be somewhere on a scale of 0-999, and the higher your score is, the better your credit score is. Excellent is usually anything over 961, good is 881 or more, and poor is anything below 720.

Of course, none of this will guarantee that you have an excellent score. However, once you are armed with details of your credit score - and the credit record it has been drawn from - you can appreciate the things counting in your favour and those counting against you. It means that even if you cannot get the mortgage or loan you need immediately, you can establish a plan of action to ensure it doesn't remain beyond your reach for long.