Credit scoring
Credit scoring is a way for firms to judge how likely you are to be able to handle borrowing. A high score gives you a better credit rating and means it's more likely you will be given credit. With credit cards it will also affect how big your credit limit will be.
When you apply for a credit card – or any sort of loan – you will first be credit scored by the company you are hoping to give you credit. It does this by checking your credit file held at a credit reference agency and weighing up the information on your application form.
Credit reference agencies
Your credit file shows how you've handled borrowing in the past and helps to prove the information you have supplied is correct by showing your name and address as entered on the electoral roll. Lenders usually only check with one agency - either Experian, Equifax or Callcredit.
Any credit card company which shares information with an agency is allowed to check your credit record though they will always tell you that they are doing this when you apply for a credit card.
And you're allowed to see your record too – either online or by writing to the agency – for a small fee. This is a good idea as you can check that the information is accurate. If it isn't you're allowed to correct your record by writing a short description of the facts.
You can also contact lenders responsible for any errors and ask them to remove the information from your record.
Obviously, if you've struggled to keep up with repayments in the past your credit record will not look good. Recent bad debts are worse than those from a few years ago and information only remains on your record for six years.
The worst are County Court Judgements (CCJs) which show that the lender has applied to the courts for repayment of debts.
Other information
Credit card companies also look at the information you supplied on the application form. Each piece of information is given a score. While your salary or other income is important, they are also looking for signs of stability. These include how long you've been in your job, how long you've lived at your address, whether you're a homeowner and even whether you are married or single.
The amount of debt you have is another important factor such as your mortgage, personal loans, other credit card debt and car loans.
It helps if they know about you already – such as if you bank with them, have other loans with them or have borrowed from them before.
All this information helps lenders to build a picture of how responsible you are about repaying debt and whether you can cope with more debt.
What's your score?
All the information the credit card company gathers on you is given a number and added up.
While they will base your score on similar criteria, it is not identical. So while one may give you a credit card, another might not. Or you might be offered a card but the interest rate will be far higher than the representative APR advertised to reflect the amount of risk they think you represent.
Your credit score can be from 0 to 1,000 though no-one will get the absolute top or bottom score. There is no definite cut-off point – it's up to the credit card issuer to decide where that is.
The reason so many people have found it hard to get credit during the recession is that lenders decided to raise the bar. Nowadays only those with really good credit scores can get a credit card offering the cheapest interest rates or 0% balance transfer or purchase offers.
