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How Does Credit Scoring Work?

There are many terms that often get confusing when it comes to credit and credit scoring is one of them. It is a term that is used a lot but it can be tricky to know what it actually is and how it works.

What is Credit Scoring?

When you read certain information, watch some adverts etc it can seem like credit scoring is something that is an agreed practice with a system in place. This would imply that every person has a score and we will know whether that is bad or good and this is used by people such as lenders to decide if we can have a loan. Unfortunately, this is not the case. Credit scoring is not a standardized scoring system. We all have a credit report but there is no score. This term is something which has been invented and therefore credit scoring is not a thing.

How Does it Work?

What actually happens is that someone will look at our credit report and then use the information on there to decide about whether they want to take us on as a customer. It is often used by lenders to see whether they will be prepared to lend us money as they will want to see whether they think that they can trust is. They will all have a different method for doing this though. They will have a look at the different details on the credit report and use that to judge us. For example, they might want to see whether we have repaid loans on time in the past and if we have, they will trust that we will do this again. They might want to see that we are making payments on time now, perhaps for things like utility bills and that could make them think that we will be able to repay them as well as we are managing our money well. They might look at the loans that we have applied for recently such as those offered at and if we have applied for a lot or if we have been turned down, that might put them off an make them feel that we are desperate for money and so they will not want to take us on or they may feel that if one lender has turned us down, that they should as well.

The problem is that they all have different ways of judging people. There are even rumours that some lenders will prefer to take on a borrower that has missed a few payments in the past because they can profit more from them as they will be able to charge them more money. It is very hard to know whether this is correct or not and best to try to pay everything on time so that you do not have to pay the extra fees associated with doing this.

Can I Improve it?

There are a few other things that you can do which will help as well. You should make sure that your credit record is correct as if it is not it could work against you. If it shows you still have outstanding loans that you have actually repaid, then this will not look good so you will need to get that corrected. You should also think about whether you will be able to do other things to help it. Perhaps paying off some loans, not applying for too many loans and trying not to apply for one you will be turned down for. Also, make sure that you make all payments on time as well as repayments to impress them.