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Credit Card Glossary: Credit Scoring

Credit Scoring

A system used by lenders to calculate the statistical probability that a loan they grant to you will be repaid. Different lenders have slightly different rules for assessing risk. Each lender works out the characteristics of 'good' and 'bad' customers, based on its past experience. Homeowners or borrowers with steady incomes may be considered less likely to default.

Each answer you give on your application form will be given a rating. If the total 'score' is above a certain figure, your application is accepted. Because credit scoring is the key to different lenders risk management they do not easily reveal the precise details of how it works.

Every score is individual and calculated using a mathematical formula that evaluates all types of information on your credit report, compared to information patterns in millions of past credit files. The score can then identify your level of future credit risk.

If you have been refused credit, you are entitled to know whether a credit reference agency was consulted (and be given their contact details) as well as whether or not your credit report adversely affected your application. If you are refused credit, under the Data Protection Act 1998 you have the right to ask that your application be assessed manually. Although you have no legal right to credit or to a detailed explanation of why any application you make is turned down, credit industry codes of practice do encourage lenders to at least tell you the principal reason behind their decision.

See also: Financial Services