As you would expect from an area of business such as mortgages, where large sums of money are paid out on a  daily basis, the financial authorities have devised a number of checks in order to highlight the credit worthiness of a potential customer - and the possible risk to them.  While there are some traditional methods to this, financial institutions will often add there own particular conditions.

In the event that information held on file about your finances or personal circumstances are incorrect, you have the right to have these corrected and notes made on your file to that effect.  If you were to reapply after such issues, there may be a better chance of being successful.

Popular Credit Scoring Methods

First of all you need to understand that the credit scoring system is not final, with many institutions allowing the right of appeal in cases where a customer is turned down for some reason.  That said, you also need to be aware of how the system works, how you can help yourself and how to correct any errors.

In the UK there are two main credit reference agencies - companies who will collate and analyse a persons individual credit elements, background and particular circumstances - who are Experian and Equifax.  The information which they use will come from a wide range of sources, and the companies have become the first port of call to check the background to an applicant and possible issues for the future and in the past.

While these agencies are vital to the credit scoring system, each lender may also take into account other issues such as :-

• How long you have banked with them (another way for the industry to instil customer “loyalty”)
• Any payment issues on your account - past and present.
• Your income.

As mentioned above, while the bank will give you a decision based upon an array of different information, in the event of refusal there is a right to appeal, and while the banks will not disclose how they arrive at your score, for a fee of around £2 you are allowed a copy of your credit files from Experian and Equifax.

What factors do the credit agencies use to arrive at their advice?

Even though the agencies tend to be very secretive about changes in their credit rating methods, it is common knowledge that the following information can be vital in any credit reference check :-

Electoral Roll

This is one of the major factors which can determine if you will be successful or not.  The authorities like to build up a picture of where you have been living and where you have moved to.  If you do not appear on the electoral roll for your current property, where have you been? What have you been doing?

If you also disappeared off the roll for a number of years at your old addresses, where did you go? If the authorities are not able to build up a picture of your history, alarm bells will begin to ring and this may have a major impact upon your ability to arrange mortgage finance.

Credit History

As you would expect, credit history is perhaps the most influential of the information which the agencies will hold on you.  As all financial institutions supply information to the agencies, it is very easy to build up a picture of a persons credit history across the industry. Constant late payments, unpaid bills and the like will have a major influence on the end result, as will a history which has shown you to be a prompt payer, who has been able to manage their debts in an orderly fashion.  This element is rumoured to account for 35% of your total credit score.

Address

As mentioned above, the authorities like to build up a picture of your movements over the last few years.  The longer you are able to reside at specific property, the greater the trust factor when compared to those who have moved addresses on a number of occasions.  Again, an applicant who has “disappeared” from the address history radar for some time will cause alarms bells to ring with finance providers.

Employer

A good and steady work history can also sway a decision which may otherwise have been borderline.  An ability to hold down a regular long term job is essential and gives the finance industry more confidence that you are likely to have a regular income in the future and will be able to cover your payments.

County Court Judgements (CCJs)

CCJs and bankruptcy situations will effectively kill any application dead in the water, with the authorities not willing to the risk without grater collateral.  An inability to manage your finances, together with excessive debts is not a good basis for taking out substantial long term finance.  While some CCJs may be filed maliciously, the fact that a CCJ or bankruptcy is mentioned on your credit file is a major black mark.

Credit Applications

A few years ago we had the trend towards what was called “credit card surfing”, the process by which credit card holders regularly switched suppliers to take advantage of attractive offers available.  Many of these “surfers” may not be aware, but they may have reduced their credit worthiness rating by applying for excessive amounts of finance - whether they received the finance or not. 

Excessive numbers of finance applications are monitored by the finance companies, and will be taken into account in their final decisions.

Age

While ageism is effectively outlawed in the UK, many still believe that this is a factor which many finance companies take into account when considering finance applications - especially long term agreements such as mortgages. As you would expect, there is little information available from the finance companies on this issue!

Credit for those with low credit ratings

While it is not the end for those with low credit ratings, any financial institution would both look to increase the collateral available to cover any agreement and also increase their potential return.  In effect this means lower amounts of finance at higher interest rates!

This has led to massive growth in what is known as the “sub-prime” lending market, a market which has recently been in the news in the US.  The US sub-prime market is currently in turmoil with in excess of 1 million home owners struggling to cover their mortgages payments, and rumours that the sub-prime finance industry could suffer future losses in the region of $100 billion!