How credit scores work

You might have heard about people asking for loans and being rejected because of low credit scoring. A credit score is a number calculated based on your credit history. Points are awarded based on the information on your credit report which collects credit and debt information (i.e. how you pay your bills and pay back loans). A number identifies the risk lenders take if they lend you the money. Usually they compare your score with others from consumers with similar profiles and predict the likelihood of repayment. Your credit score doesn’t only affect whether you get a loan or not, it also affects how much the loan is going to cost you. A low score implies high risk which will result in a higher interest rate.
In most of the cases the score is calculated by the lender. There are many factors used in credit scoring and most are kept well hidden. Overall, your score will be finally established by your credit history, electoral enrolment and stability of your employment and housing status. If you lack one of the above requirements the lender might ask you for more information before lending you money.
Credit scores are not static; they change in line with your report. The following tips can help you improve your score.

• Review and correct errors in the credit report.
  
• Don’t close credit card accounts that you no longer use because you have transferred all debt to one account. Lenders often look into the debt to credit ratio and having less available credit and the same amount of debt can have a bad effect on your credit score. But don’t open new credit accounts just to increase your available credit.
  
• Hold on to old accounts as a confirmation of credit history.
  
• Reduce the balances on credit card to less than 50 per cent of available credit.
  
• Pay your bills on time.