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How Does Credit Scoring Work?

We hear a lot about credit scoring and how we need to make sure that we have a good score, but it can be confusing. Many of us are probably unsure about what it actually means and how it works.

What is a Credit Score?

The term credit score is actually inaccurate. It implies that there is a standardized system where people will calculate a credit score and will therefore have a figure and then decide whether that figure is high enough for them to accept it. Unfortunately, there is nothing of the sort. Each person looking at your credit record, whether that is a lender, landlord or whatever, will just loo at the information on the page and make a judgement based on it. They will decide whether they feel that it fits in what they personally think makes a good credit record. His means that it could be the case, that one lender will like a particular credit record and one will not. This could be because they are looking for different things.

These are some things which it is likely that they will be looking for. They are likely to be looking to see whether they think that they can trust you. This means that they are likely to be thinking about whether you have repaid loans that you have taken out in the past, if you are making payments as expected on utility bills or mobile phone contracts and things like this.

Who Uses it?

As mentioned, lenders will be interested in your credit report. If you want to take out a loan, most of them will want to check and make sure that you are capable of repaying it. They will do this by looking at whether they feel that the evidence on the report points to them being able to trust you to make the repayments on the loan. They are not the only people that will look at it though. There are landlords as well. When you apply to rent a home, the landlord or letting agent will do a credit check. They will want to be sure that they can trust you to pay the rent on time and every month. You may also find that utility suppliers and insurers use it as well. They might want to see whether they can trust you enough to let you pay in monthly instalments or whether they should not. An insurer may insist you pay for the year in advance and utility supplier may fit a prepayment meter. You may even find that there are some potential employers that might use it. They might want to check that you can be trusted around money or that you will not be likely to be bribed, which could be more likely if you are not managing your money well.

How to Improve it

So, it can be a good idea to make sure that you do what you can to make your credit report look as good as possible. Obviously, with no agreement on exactly what makes a good one, this is not easy. However, you can use a common sense approach It is worth making sure that you make all payments and loan repayments on time so that you are able to prove that you will be able to do this when you have a loan, rent or other payments to make. It can also look better if you do not have that many loans as otherwise they may worry that you will be spending a lot of money on repayments and there may not be much left. They may also see lots of loans or loan applications as an indication that you are struggling to manage your money.