Business, Legal & Accounting Glossary
Credit scoring is a system employed by lenders to calculate the statistical probability that a loan they grant to you will be repaid. Different lenders have slightly different rules for assessing risk. Each lender works out the characteristics of ‘good’ and ‘bad’ customers, based on their past experience and credit score.
Credit scoring allows lenders to determine whether or not you fit the profile of the type of customer they want to lend to. It works by comparing your details (such as your previous credit history, job and salary) with those of previous customers who have paid on time.
Each answer you provide on your application form will be given a rating. If the total ‘score’ is above a certain figure, your application is accepted. Because credit scoring is the key to different lenders risk management they do not easily reveal the precise details of how it works.
Every score is individual and calculated using a mathematical formula that evaluates all types of information on your credit report, compared to information patterns in millions of past credit files. The score can then identify your level of future credit risk.
If you have been refused credit, you are entitled to know whether a credit reference agency was consulted (and be given its contact details) as well as whether or not your credit report adversely affected your application. Since the Data Protection Act 1998, you also have the right to ask that your application be assessed manually.
Although you have no legal right to credit or to a detailed explanation of why any application you make is turned down, credit industry codes of practice do encourage lenders to at least tell you the principal reason behind their decision.
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This glossary post was last updated: 15th February, 2020 | 1 Views.