Credit Scoring Systems
A credit score is a useful way of determining whether or not a person is credit-worthy.
Often companies use credit scores to determine whether a person qualifies for a credit card, service or specific
loan. The higher someone’s credit score is, the more likely they are to receive favourable rates and be liable for
loans, extra credit and other benefits accorded by service providers.
Companies use credit scores to see how people have managed their credit responsibilities in the past in order to
decide if they are eligible for new credit and to establish the conditions under which that credit is given. Credit
scores are seen as an objective measurement of a person’s credit risk and help companies make vital decisions when
it comes to loaning credit. The lower someone’s score is, the higher their risk is to accumulate future bad credit.
For example, a credit score can estimate whether or not a person is likely to default on regular payments on a
loan. Lenders typically use the credit score in conjunction with information provided by the client during the
application process, such as any other banking relationships you may have or the length of time you’ve lived at
your current residence.
The score ranges on a scale from 0 to 600. The majority of scores fall between 300 and 500. The lower your score,
the higher your risk is to potential lenders. A score of 275, for example, is very poor and presents a considerable
risk to lenders while a score above 470 is excellent and lenders will be more inclined to award credit. The range
of scores affects each application differently and every lender uses their own strategy when employing the score.
Credit reporting agencies use a specific mathematical model to analyze
the information from your credit history to create a credit score that can be used by companies. The following
factors are mostly included when calculating credit scores:
- New Accounts:
Many new accounts that have been opened over a short period of time
can lower a person’s credit score.
- Current Accounts:
Too many open accounts, whether they are in use or not, can have an adverse effect on a credit score.
- Public Records:
Matters of public record – which include bankruptcies, collection
items and county court judgments (CCJs) – can have a negative effect on credit scores.
- Payment History:
A history of late payments on past and current credit accounts
will result in a lower credit score.
- Credit History Length:
The longer a person’s credit history, especially if it is a healthy credit history, the more valuable it is for
their credit score.
If someone has too much debt on their record it will lower their credit score. The nearer you are to your
credit limit, the stronger the negative effect will be.
- Credit History Requests:
A large number of recent requests for your credit
history can result in a lower credit score. When someone requests a report, that search is recorded.
Credit in Minutes Tip #1
Stay on top of your credit report. Most credit reports contain errors. Make sure you check your credit report
every year (you get one free credit report every twelve months) and if there are errors make sure to challenge them
with the reporting credit agency. Credit agencies are required to investigate each and every challenge that gets
Credit in Minutes Tip
Just because you qualify for all of those credit cards does not mean you should get them. A person with too many
credit cards looks sketchy in the eyes of a potential creditor. Think of it this way: if a person is financially
stable does he or she need ten different credit cards? Wouldn’t just one or two suffice?
Credit in Minutes Tip
The best way to raise your credit score is to make all of your payments on time. It sounds too simple to be
true, but that’s all there really is to it. Staying out of debt and/or making all of your debt payments on time
will keep your score up where it should be.