What is credit scoring?

A potential lender needs to assess whether you are a good credit risk. They will ask certain questions of you to get an idea of the wisdom of lending you some money.

Imagine a friend has asked you to lend them £50. You will mentally weigh up the chances of getting your money back before saying yes. Your decision will be based on how well you know the person, their previous track record and the strength of your friendship.
The decision process that you go through with your friend is very similar to the process that the potential lender goes through. The difference is that the lender has to be more systematic about it and, as far as possible, remove any subjective factors from the decision process.

The potential lender will ask a series of questions and assigns points to the various answers that you give. Anything that indicates stability is a good thing and gets + points.  You get more points the longer you have lived at your current address. You get more points as a homeowner. You get more points the older you are and the longer you have held a bank account. You get more points for having borrowed and repaid money in the past.

You lose points for anything that indicates a lack of stability. In other words the opposite of the + point list. In particular failure to maintain a previous credit agreement will count heavily against you.

The computer tots up your score and there are 2 significant figures, which we’ll call A and B. The exact details of both the scoring system and the value of A and B will vary from lender to lender. A score above A means you pass. A score below B and you will fail. Anything between A and B will be referred to a human being to look at the case and probably ask for some more information before making a final decision.

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