What is credit scoring?

Credit scoring is performed by financial product providers, who need to find out how much of a risk is associated with the money they lend. You will be credit scored on just about every application for a credit product you make. Even those loan companies which purport to loan almost anyone money will still carry out a credit score on you using the information they can glean for you or on you, and will still need to make a decision on whether to give you credit. Despite their assurances, if you have never ever paid back a loan you've been given, then you are restricted to the most great white of loan sharks.

The system that performs the credit scoring has the ability to predict the future conduct of a loan account based on the past performance of those with a similar credit profile. Each detail on your application is given a 'score'. Those are added together, with the total score being a measure of the risk associated with your loan application.

It is not just the information you provide that is used to score you. Should you have a product with the lender (such as a bank current account) you could be scored on how you have managed those accounts. They will also go to a credit reference agency, who will provide them with information on you that you might not even know they have. This information builds up a 'profile'. It involves your age, loans you have already, employment history, address history, and hence your score.

The reason most product providers use credit scoring is that it can make sure that each application for credit is assessed in the same manner. The systems have to be reasonable and accurate, and are checked frequently. Computers are programmed to essentially decide sometimes whether or not someone gets a loan, and this should be responsibly monitored, for the good of both the lender and the customer. This in turn is monitored by the Office of Fair Trading, a government department set up to protect consumers. They feel that credit scoring is an aid to more responsible lending, so encourage it as long as it is fair.

Many people want to know their credit score. This is not surprising, as it is information on yourself, and could help you work out how to improve it. But you will find that you will never be told your credit score. The product providers can't provide this information as it could reduce the whole system's security. Knowing how your credit is scored gives you ammunition to make fraudulent applications, changing little details to make sure you are approved. So the system remains shrouded in confidentiality.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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