Finance lenders use credit scoring to decide who to lend money to. You earn a certain number of points for each bit of information in your application – for example, how long you’ve lived at your address, how long you’ve been with your bank, and, possibly, your income and outgoings.
Companies may also obtain details of your current credit commitments (and any problems such as defaults, arrears, CCJs etc) plus electoral roll information from one of the credit reference agencies, and this information will also be taken into account. The points are then added together to give your overall credit score. If you have more than a certain number of points, your application will be accepted, if you fall beneath the required number, your application for a loan, mortgage or credit card will be declined.
Consumer debt in the UK has spiralled over the past few years as a consequence of low interest rates and 'easy credit'. However more and more people are becoming insolvent and declaring themselves bankrupt or entering into an IVA. Lenders have responded by stiffening the criteria they use when processing applications for credit. Hence, more and more applicants are being rejected as the banks become wary of 'over-lending'.
Knowing your score
Unfortunately, you won’t be able to find out what your credit score is: banks and credit companies each use their own scoring systems and keep them confidential to help prevent fraud.
Your "points" score is based on your past record as a borrower and your current behaviour, but different lenders will interpret your file in different ways.
One bank might look favourably at a customer who has three credit cards, and rarely misses the minimum monthly repayments, as it shows they are adept at juggling their resources. However another lender might regard this as evidence that the customer has built up too much debt and giving them additional credit would mean they would be overstretching their finances.
Improving your score
It’s very difficult to improve your credit score but there are some things that will help boost it.
1. Make sure you’re registered on the electoral roll: companies use this information to confirm your current and previous addresses, and not being on it will affect your credit score. According to the Electoral Commission, more than 3.5 million people in England and Wales are not on the electoral roll. And as a result they're probably paying higher interest rates for their loans and credit cards.
2. Avoid making too many applications for credit. Each time you apply for credit, a company will carry out a credit search and a search will be registered on your credit file. Too many will count against you.
3. How you handle your existing credit has a big effect too, so make your payments on time and don’t exceed your credit limits.