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How do Lenders Use Credit Scoring?

It is important to understand the importance of credit scoring when you are considering borrowing money or even if you are not. Many of us will want or need to borrow money at some point and it is important to plan for that. Even if you think it will not be a situation you will be in, you never know for sure and it could be something like getting a mortgage, which is a positive type of borrowing but still needs a good credit report. It is therefore worth thinking about what credit scoring is and how it is used by lenders so we have a good understanding of why it is something that is worth trying to improve.

What is Credit Scoring?

Credit scoring is something which actually does not exist. This is a surprise to many people as we often have the impression that we each have some sort of credit score and that is used by people to judge us. However, it is not this simple as the different places that look at your credit record will actually be looking for different things. This means that you will just need to get your credit report looking as good as you think you can and hope that it is going to impress those people that are looking at it.

What are Lenders Looking for?

So, although there is no specific formula, it can be a good idea to think about what lenders might be looking for. It is likely that they will want to find a borrower that they think will repay their loan. They will want their money back and they will therefore only lend to people that they are sure will be able to afford to repay their loan. It is therefore likely that they will be interested in a number of things. Firstly, they will want to make sure that the borrower is capable of making regular payments as most loans require monthly repayments. They will look and see whether you are able to keep up with regular payments on loans you have now as well as other things like utility bills or phone contracts. Some may want to see a perfect record, where you repay everything on time, all of the time but some may not mind a few missed payments. This is because if you miss a few payments, they will be able to charge you more and make more money out of you. However, do not miss payments on purpose as you will end up paying charges and many lenders will not be impressed by you doing this.

They will also look at how many loans you have. If you are in a lot of debt already, then they may feel that it is more likely that you will not be able to afford the loan that you take out with them and therefore they could turn you down for that reason. They will also not like it if you have applied for loans with other lenders and been turned down. Some lenders will be instantly put off by that and will not even bother to look further. If you have done a lot more borrowing recently, then they could see that as a sign that there have been some problems recently with your finances and they may be concerned about that. There is also a chance that they might look at your income as well and think about that. If you are self employed, your income is not guaranteed and so that might put them off and they may also be put off if you are a freelancer or temporary worker or even if you are a contractor as you do not have such a stable job. They may also look at your salary level and work out whether it will provide you with enough money to be able to pay them back.