Clive Lewis, head of enterprise, ICAEW, on why you need to understand credit scoring
This article is brought to you in partnership with ICAEW
Perhaps one of the least understood aspects of personal or business finance is credit scoring. It is vital that businesses understand how they are “scored” or “rated” by banks and the credit reference agencies.
Once an application for finance is received by a finance provider they will try to build up a picture of your personal and business circumstances. This and the information you provide to support a finance application – a business plan and financial forecasts will be used to assess the application.
Your financial footprint already tells a story
Banks, building societies, utilities companies and other organisations compile details of all your payments and transactions on credit/store cards, loans, mortgages, bank accounts, energy and mobile phone contracts.
Around 350 million records a month are tracked including details ‘default data’, where you’re officially in default, and ‘full data’ which incorporates how you generally operate the account, from being the model customer to defaulting.
‘Default data’ has always been shared by financial companies but since the late 1990s ‘full data’ is shared too. This means each lender now has access to all information about you from other organisations.
Experian, Equifax and Callcredit compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. This data comes from five main sources:
Electoral roll information. This is publicly available and contains address and who lives with whom details.
Court records. County Court Judgments (CCJs) and Bankruptcies indicate if you have a history of debt problems.
Search, address and linked data. This includes records of other lenders who’ve searched your file when you’ve applied for credit, addresses you’re linked to or other people you have a financial association with.
Fraud data. If you’ve committed a fraud (or someone has stolen your identity and committed fraud) this will be held on your file under the CIFAS section.
What do banks do with the information?
Finance providers will already have some information on you and/or your business before you apply for finance, particularly if you have a current account with them. How you manage that current account will be a key element in their decision.
They use the information from the credit reference agencies together with bank account data to build up five different elements of your credit profile:
- Your payment history
- Your total amount of debt
- Time and Length of credit
- The type of credit you have
- The New credit applied for
The first two of these are likely to contribute most towards your credit score. You need to get these in order to improve your credit score in the longer term.
It is important to note that there are many factors that affect your credit score. The score can be affected by the amount of available credit you have with your bank, credit cards, the length of time you’ve had a credit history, the number of enquiries made on your credit profile and more.
For businesses, as your business builds up a track-record and history in its own right, then the balance of future lending decisions becomes more about the business than the person(s)
What happens if your finance application is declined?
If your personal or business application for finance is declined, make sure you get a written reason why. If you did not pass their credit score they should tell you, although, as it is based on a variety of factors, this might not be as clear as you would like.
You do have a right of appeal against adverse decisions, provided you appeal within 30 days of the notification of refusal of a formal application.
If you believe that the decision is based on information from a credit agency and it is incorrect or out-of-date you should contact them to obtain a copy of your credit report. The three agencies operating in the UK are listed at the end of this article. Your bank should tell you which agency they referenced in assessing your application. The agencies will make a small fee for supplying details.
Data from the British Bankers Association’s SME Finance Monitor demonstrates that an adverse credit score is likely to result in an application for finance being refused.
Clive Lewis is the head of enterprise at The Institute of Chartered Accountants in England and Wales (ICAEW)
You need to read: