Why lenders carry out credit searches and credit scoring
Credit search and Credit scoring are carried out by credit card companies to assess risk when lending to borrowers.
The credit card companies will assess the borrower’s financial history, by conducting a credit search, to ascertain how well he has conducted his commitments and to highlight any specific instances of problems that may have occurred. The credit card companies will use credit reference agencies such as Experian and Equifax to provide credit searches. These organisations have vast databases of information on individuals in respect of previous bad debts and default, county court judgments and bankruptcies.
The next stage is credit scoring. This is carried out to predict the borrower’s future financial behaviour based on his past financial behaviour. Credit scoring is a statistical tool by which scores are apportioned to various features of the application based on the borrower’s historical data obtained from a credit search.
Each credit card company will have its own method of credit scoring but typical features on which they will award points are:
Length of time credit has been held by the borrower – If a borrower has had credit for a number of years the credit card company will have plenty of information to assess his credit history than someone who has never had credit or has had credit for a limited amount of time.
Does the borrower make his payments on time – Missed payments, county court judgments and bankruptcies will all have an adverse effect on the borrower’s credit scoring.
How much does the borrower owe altogether – Depending on his income and outgoings the borrower will only have a certain amount of disposable income. If the borrower is close to the maximum amount he could reasonably borrow the lender will be reluctant to offer further credit.
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Further information
Click here to read more about credit cards for people with bad credit ratings