Information about credit scores

This is how the lenders can find out certain information about us.  From this information the reference agencies provide a credit score.  Many lenders operate their own credit score system, but in general they are all alike.

From the information contained about us we are given a score.  The higher the score, the better the credit rating.

Advantages to a high credit score.

You are put on voter’s role at address given to them.  The longer you are on there, the better.
You have no County Court Judgements.
No defaults.
No missed payments on credit.
Items of credit run satisfactory.
You gain a long history of credit, with a good payment history.

Disadvantages to a low credit score.

You may be put on the voter’s role.
You may not have any credit.
But if you do have credit, it has late payments showing.
You have defaults.
You may have County court Judgements against you.
Credit that has not been running for long will be taken out of finance.
There will be a few credit searches.

The advantages of the credit score to a lender, such as a credit card company, are that they can risk assess your application quickly and cheaply.  The higher your score, the lower the risk.  This is the same as car insurance.  Your age and number of points on your driving licence, together with the number of claims that you have made, all have significant bearing on the cost.  This is not to say that someone in the high-risk age group with lots of driving convictions is going to ever make a claim, and some one who is seen by the insurance companies to be low risk may well make a claim.

But it is all down to statistics.  Lenders all have a default rate-i.e. the number of accounts that are in default.  If this figure becomes too high then they need to be a little more selective, if it is too low, then they are being too selective and need to adjust their risk assessment procedures.  For example, if they are running at a 5% default rate and 10% is acceptable, then they are being too fussy and therefore turning a lot of good business away.

Many lenders may use the same credit score system, but they may all have different acceptance scores.  The lenders who offer the lower rates tend to require the higher scores, and consequently have a lower default rate.  Lenders who are not fussy tend to be more expensive as they have more bad debts to cover.  Just like car insurance, those in a high-risk group pay more for their car insurance.

The credit score system is easy for the lenders to use.  They look up your details and get your score.  If the score is high enough, then they accept you, if not then you are rejected.  This is a cheap method of underwriting a finance facility.

Some lenders have a policy – “No voters role, no loan.”
There are disadvantages to this that many a good applicant is refused finance and many risky applicants are accepted.  There is no account for job security and income to debt ratios.  Some one who has increasingly been living on credit and not missed any payments will have a good credit score, as their outgoing finance repayments are more than their income coming in.  They have to do their shopping on the plastic, and borrowing more money to pay other repayments.  Eventually this will all some to an abrupt halt, and all payments will be missed.

Other lenders will look at applicants differently.  They may not be too concerned about whether or not you are on the voter’s role, and may accept utility bills over the past three years to prove your address.  The voters role is important because if some one has credit and / or debts like county court judgements, then that is going to be registered against them at their home address.  When some one applies for a loan and they are not on the voter’s role they could be giving a false address in order to avoid the judgements, i.e. from being detected on the search.  They may give a family members address, saying they are living with their parents, or a brother or sister, or commonly giving their partners address.  They give the address and state that they have been living with their partner for the past 3 years.  Proof of address is usually accepted in the form of utility bills, a driving licence, as many cases are and are not genuine.

They will want to know what your current out goings are, and what money is coming in. They want to lend the money, but want to know if you are going to be able to afford repayments.  They may not be concerned about past credit problems, provided that there is a good explanation, and that the reasons for the problem are no longer an issue.  This way they may be able to lend to someone who is going to be a good payer, but had a low credit score.  Rates will vary from lender to lender, there are additional costs for the lender in their underwriting process, but they do know more about the applicants ability to repay.

How much money someone earns is not a good indication of credit worthiness.  Some one may earn very little, but still never miss a payment.  Where as someone who earns quite a bit, may be a terrible payer, as they are disorganised with their finances or just resent repaying loans.

So the credit score system is simple, you either pass or fail.  Just to recap, if you have a good credit score you certainly have the scope to shop around, to pick and choose the best company for you.  But if you have a low credit score it is not so straightforward.  It is not easy to shop around and if you do find some one willing to take you on, it may well be expensive.