How Credit Scores Work And How To Rebuild Credit History

Thu, 1st April, 2010 - Posted by admin

How Credit Scores Work And How To Rebuild Credit History

How Credit Scores Work

A credit score is an analysis of an individual’s credit files to establish the history of that person and then determine whether or not that individual is worthy the credit on offer by a particular financial product. Having a good credit score means you will be able to get a loan, credit card and any product on instalments such as mobile phone contracts or hire purchase electricals. During the application process, all lenders go through the process of checking your credit history to determine whether you are eligible for credit. What they’re looking for is a sign of reliability that you have the means and capacity to pay back the loan. Nobody knows what the scoring system is like as they have never been published and they differ bank to bank, but there are certain principles which remain constant that are signals all lenders are looking for.

What is credit history?

In simple terms credit history is a record of a company or an individual’s repaying history. Credit score, being a nominal calculation devised by each lender, normally goes down when you miss one or more payments, log multiple credit applications on your file, approach your limits across products, and of course if you default on debt and declare bankruptcy or file for county court judgements (CCJs). The image below shows how you can drop from having a good credit history to bad credit history.

credit score factors
fig 1.1 – A visual indication of how your credit score can fall

Contrary to popular opinion there is no single source of ‘credit score’ – each lender comes up with their own scoring system based on data available to them. Generally in the UK there are credit reference agencies that collect all the data and information from various sources and then provides these information of credit on individual or a company of their past credit uses. From this data a lender uses their own process and criteria, together with their own data (eg if you’re an existing customer for another product), to decide whether to accept you.

Getting Back in the Game: Rebuilding Credit History

Many people nowadays are struggling with bad credit score. They are unable to buy products in instalments or get any loans or mortgages through any companies.

With more an more high street banks tightening their acceptance criteria, consumers are becoming increasingly frustrated at being rejected on credit card applications. One way of getting your credit score up again is going for one of the range of credit cards for bad credit on the market. These credit cards are meant for those who have bad credit history. Used correctly, they can help you build your credit history up again as long as you don’t miss any payments. But this comes at a premium, as the interest rates on these cards are typically far higher than others. The trick is to try and pay off your balance in full every month, thus avoiding paying high interest on your debts.

It does take time to grow your credit score but as long as you are doing things right you can rest assured that the credit reference agencies are keeping track of whether you’ve been good or bad, and this information will be scored when you next apply for a product. These credits cards is a glimmer of hope for them who are struggling to receive monetary assistance for their urgent financial needs.

Once your credit history is back to ‘healthy’ status again, you will be laughing – we suspect this young chap has just been approved for a great deal on a low interest credit card, and the excitement has gotten to his head!

About the Author:

Tom is a money and finance blogger currently focusing on credit cards for bad credit and poor credit credit cards. He takes particular pleasure in getting his head around the complex world of personal finance and helping to explain it in plain English to help others to manage their money and escape debt.

Collection of Articles On Personal Finance (Carnivals):

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