A Closer Look at Credit Scores

(This is a guest post)

When applying for any form of credit, such as a credit card or a loan, it is very likely that the lender will carry out a credit check on you. This means using a credit reference agency to look into your credit history and using your overall credit score to determine whether or not you are a risk to the lender and what type and limits of credit you should be given access to.

There is quite a lot riding on the information contained in your credit file, as it could mean the difference between an approved credit application and a rejected one. Putting aside all the other information included in your credit file for a moment, let’s focus on the credit score.

When you look at your own credit report, which you can do for free or for a small fee from a credit reference agency like Experian, Callcredit or Equifax, there are two parts of your file you will be given access to. The first is the report itself, containing all the information about you and your credit history, and the second is your credit score. You credit score usually takes the form of a three digit number, and it will be somewhere in between 300 and 850. The higher the score, the better your credit rating and the more likely you are to be accepted when you apply for credit cards and other types of credit. The lower your score, the more of a risk a lender will see you as being and the more likely you are to be rejected.

If you look up your credit file using more than one credit reference agency, you might notice that your credit score is different. This is because there is no one score or central database that all reference agencies and all lenders use – they each look at different criteria and use different formulas to work out your score. However, most credit reference agencies will look at the following five factors in order to come up with a score for you:

1. New credit
2. Type of credit used
3. Length of your credit history
4. Amounts owed
5. Payment history

The last two of this list of five are the most important, accounting for 30 percent and 35 percent respectively of your total credit score. If you miss a payment or owe a lot of money, you could find that your credit score is lower than you, as well as lenders, would like.