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Credit scores explained

Guide to credit scores:

Your credit history is the main determinant of your credit score or rating. This is the principal criteria upon which the decision regarding a credit card or loan application is based. Different credit scoring agencies have different scoring systems and the scores for an individual will vary, but are usually around the same.

This has a great affect on the application process. The company you apply with will make their own calculations with the score after they perform a credit check, and use this to determine if your application is successful. Not only does this affect your application, but even if your application is accepted you may not be eligible for the advertised interest rate for the card in question (which the card issuer only has to offer to 51% of customers by law).

Good practices before making an application

It is useful for you to be aware of your score with the 3 main agencies (Experian, CallCredit, and Equifax). It only costs a small amount to check your score, which you are legally entitled to do. If you determine that some of the details in the credit file are inaccurate you can then request a modification with the agency in question. You should provide supporting evidence and explain why the details of the file are incorrect.

If you have recently been turned down for credit, it may be useful to ask the organisation that turned you down to explain why they did so. They are not legally obliged to, but any information they provide could be very indicative of what areas you should possibly focus on in order to make your profile more successful for applications in future.

Another obvious good practice is to make sure any outstanding debts you have are cleared, which can obviously be easier said than done. Overall good financial standing is the basis of a good credit score. It is also useful to close down any dormant accounts or accounts you do not use anymore. This is because the credit card company might be concerned if you have too much current lending facilities open to you which could result in large borrowing that you may not be able to pay back. So tying up loose ends before applying is a good idea.

Intermediate methods of building credit are also a good option. A credit builder card may not have a very competitive interest rate, but is a good stepping stone to better credit scores.

A surprising way to boost your credit score is by registering to vote. Registering is quite straightforward and will have a positive affect on your credit score.

Consider also the timing of your application. If you have recently been turned down for credit it will have a temporary impact on both your credit score as well as the impression you make on the bank viewing your credit file. It could be better to wait a while before you make another application. Furthermore, if you have changed job or residence recently it can have a negative impact on the likelihood of your application being accepted.

While these steps are a good start to getting your profile application-ready, there are some other factors to be aware of:

Legal matters:

If you have filed for bankruptcy in the past 6 years it will leave a negative mark on your credit history, as will a County Court Judgement ruling against you or if you have entered into an Individual Voluntary Arrangement. Details of late payments in the last 3 years will also show up. Making only the minimum possible repayments on a credit card debt also has a negative impact.

Lack of credit history:

It may seem strange, but having no credit history whatsoever is also bad for your chances of a successful credit card application. This is because lenders look to your credit history to see if you repay amounts owed on time, and having no borrowing history leaves them with nothing to go by.

Another counter-intuitive situation is where you might borrow small amounts and pay them back on time, but this can also in some cases work against you as you may not be seen as a profitable prospective customer by the bank or building society. That being said, it is of course always better to have a less extensive but orderly credit history than one with lots of borrowing and some missed repayments.

Overall it’s wise to take stock of your credit score situation before making any applications. Then you can see what possible measures you can take to improve your score to a sufficient level that will allow you a good chance at successful application to the card that matches your priorities. With this information in mind, you should proceed with a bit of caution and keep researching since the requirements for different cards can change and also your credit score can change while you are shopping around for the right deal.