When you apply for a credit credit, lenders check your credit record, called credit scoring, with specialist
credit agencies that collect information from the courts, lenders and the electoral roll.
Credit scoring is,
specifically, a numerical calculation by a credit card issuer assessing
your suitability to obtain credit credit from them and also the
likelihood of you maintaining regular payments.
Simply being problem free with past credit is no guarantee when it comes to applying for credit cards. Credit card companies operate their own credit scoring rules, which take into account whether an individual is a good risk for a credit card. Credit scoring can go further: banks and other lenders can use the system to decide whether an individual is the sort of customer they want.
This leads to anomalies: the same person could be accepted by one credit card issuer, but turned down by another, based on identical information. Some of the newer banks, especially those operating over the internet, appear to have very strict credit scoring criteria, suggesting that they are looking for better off customers, rather than simply those with a clean credit record.
It is the credit card company and not a
credit reference agency that sets credit score criteria. There is no obligation on a credit card issuer to reveal the criteria it uses, and most keep the exact details secret in order to deter fraud.
The points that matter on a credit score, and the weight given to individual criteria will differ from lender to lender and even from product to product. A gold or platinum credit card, for example, will have tougher rules than the standard card.
All standard credit scores start with the negatives: defaults, CCJs and bankruptcy. Once the lender has checked these and looked for poor payment patterns, it will then go on to make more subjective judgements based on the applicant's credit reference agency file and, of course, on the application form.
Homeowners will score more better than people in rented accommodation, and permanent employment is rated
more favourably in comparison to self employment and unemployment. Married people, in particular married men, usually have a higher credit score than their unmarried counterparts.
Other criteria such as having the phone line in your name as well as being on the electoral
roll will help.
A track record in managing credit successfully is most likely to count in your favour. Lenders want to know that the person they lend to can handle the debt, and the best way to demonstrate this is to have borrowed before, without running into trouble. A couple of credit card accounts in good order, or a personal loan, will be plus points. Too much debt, though, will reduce a credit score.
A poor credit score will cost you money
The best credit cards deals are only open to people who meet the credit scoring requirements set down by the main credit card issuers. People with a poor score, or a blemished credit record, will not be able to take out the low interest credit cards and will end up paying more in interest charges.
There are credit card companies who are targeting individuals with
poor credit
records.
For instance Capital One are more tolerant of individuals with a bad credit history and invites people who may have been refused credit in the past to apply its Classic Mastercard. However the card purchases will be charged at an APR (annualised percentage rate) of 29.9 per cent, while cash withdrawals will attract an APR of 31.1 per cent. This compares with rates of 11.5 per cent and 20.6 per cent for Capital One's Platinum and Premier Mastercard, for customers with a good credit record.
The American card company is one of a number that offer credit cards at a price to those who would otherwise have difficulty obtaining it. Others include Barclaycard, with rates of 24.9 per cent and 28.1 per cent.
Critics of these cards say that individuals who already have a problem managing their borrowings should not be offered more credit, especially not at these high rates. Anna Bowes, of Chase de Vere, an independent financial adviser, says: "How will people with existing debts be helped by having to pay interest rates of 29.9 per cent?"
However Capital One says that ownership of its card enables people who have had financial problems in the past to rebuild their credit history. A spokesman says: "We offer wider access to credit cards than most banks, but there is a price to pay for that. It is a trade-off between risk and price in the same way that if a motorist has a lot of crashes he will pay a higher insurance premium."
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