Keeping track of your creditworthiness is a vital part of making sure you are in control of your finances. But it can be a real nightmare if you do not understand how the system works! Many people don’t realise that you can get an instant online credit report these days and do a detailed check of your credit history.

By monitoring your credit score, you can keep an eye on your general creditworthiness safeguard your credit record. Being informed will also put you in a strong position, for when you need to apply for lending or a credit card.

What is credit scoring?

If you take out a loan, mortgage, bank overdraft, credit card, contract mobile phone, kitchen on credit or even household insurance; lenders will always credit-score you to attempt to see what kind of customer you are your likely to be.

Credit Scoring systems are never made public and differ betweens lenders and even between products with the same lender. Just because one company rejects your application, doesn't mean another will automatically. Companies have access to the 3 credit reporting agencies in the UK; Equifax, Callcredit and Equifax, but they may not use all 3 of the credit agencies at once.

Credit scoring dictates what products you'll receive, and also how good the rates you receive will be . Take for instance loans; most loan rates are ‘typical', meaning the APR actually depends on your credit score. Or credit cards; if your score's too low for the low rate deal you wanted, you might get accepted but sent a different, less competitive product with a less favorable interest rate.

Get your Free Credit Score and Triple Agency Report (Experian, Call Credit and Equifax)

Credit Card Tricks

Be aware that if you use various credit card tricks, or have been a credit card tart, this could impact your credit record. There are a number of credit card secrets that the card industry conceals, so it's very important to understand how these works.

Credit Scoring

It’s all about how financially attractive and profitable you are...

Many people find it extremely frustrating and shocking that they get rejected in credit applications, but as the saying goes, “it's not you, it's them”. While you must do all you can to be as attractive to a lender as possible, sometimes you just aren’t the type of customer they’re looking for. Here's a little secret...

Credit scoring is primarily about profit making not risk...

This is so important, let's say it again...

Credit scoring is primarily about profit making not risk...

Even good risks can be rejected just because they won't make the bank any profit!

A bank picks customers for their own good, NOT yours, so the scoring process is about profit-making and not risk. So while risk plays a part, (as those unlikely to repay are a drain on profits), even the most solvent can be rejected if their behaviour as a credit consumer, is unlikely to generate profit for the lender.

Your credit score will reflect how desirable you are to lenders as a money making venture! This is the cold, hard truth.

Credit Crunch Woes

The credit crunch has made this worse!. The sooner we understand banks are there to make money, and more specifically profit, and not help us, the better we can negotiate the financial system.

It’s about sophisticated customer selection, with lenders trying to pick their perfect customers. So reasons for rejection can seem random to you, but makes perfect sense to them. For example…

Credit card companies may decline you application because you for always repay cards in full.

The most profitable credit card customers are those who are constantly in debt, never defaulting, but always managing to meet the minimum repayments.

If you pay off your card in full every month, don’t use cards enough, or always shift debt to 0% cards, they may reject you if they pick this up.

Banks score you based on products they'd like to sell you in future. They use loss leading products to draw you in, like a current account paying a high rate of interest on a small balance.

So when you apply, rather than scoring you as a bank account customer, they could actually be scoring to see if you’re likely to be a profitable borrower for more expensive, higher margin products in the future. It is possible to improve your credit score though.

We need to clear up two huge myths…

• Universal credit ‘ratings’ and ‘blacklists’ DON’T exist.

Each lender scores differently and there is actually not one Financial Big Brother watching you and tracking your every move, although sometimes it feel that way! That said, the information credit card companies and lending institutions use is pretty similar; so a bad risk for one lender is often a bad risk for others too.

You'll be given a different credit rating by each of the three credit agencies (a snapshot on the day you get it). But lenders use that score as just one part of their decision to lend, and each lender may look for a different type of borrower to suit there business niche.

• Lenders are obligated to give credit

This is certainly not the case. It's all about making profitable business for themselves; banks prefer to deny a few good quality applicants rather than have to deal with every applicastion personally or accepting large numbers of unprofitable customers.

What banks do know about you…

Banks use data from a variety of sources to make their lending decisions; including data held by the 3 credit reference agencies: Experian, Equifax and Callcredit. However; the information they have is by no means comprehensive.

There are three additional prime sources of information used for your credit score.

The Application Form

Here, lenders obtain the important details of your postcode, salary, family size, reason for the loan and whether you're a home owner. Make sure that you fill the forms in correctly; one slight error, such as “£3,000” salary rather than “£30,000”, can immediately mess up your application and possibly future ones too.

Past Dealings with the Company.

Banks and Lending Companies use internal group-wide records of their previous dealings with you to help assess your behaviour, though data protection rules can limit which separate units of a company can have access to this information. This could mean if you' have a good track record with a particular company, it's more likely to give you credit.

Credit reference agency files

Experian, Equifax and Callcredit compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file.

Get your Free Credit Score and Triple Agency Report (All 3 credit agency reports)

This data comes from 5 main sources:

Electoral roll information. This is publicly available and contains address and who lives with whom details.

Court records. County Court Judgements (CCJs) and Bankruptcies indicate if you have a history of debt problems.

Search, address and linked data. This includes records of other lenders who've searched your file when you've applied for credit, addresses you're linked to or other people you have a financial association with. Check you credit data to see if you are financially linked to someone you are not aware of.

Fraud data. If you've committed a fraud (or someone has stolen your identity and committed fraud) this will be held on your file under the CIFAS section. It is possible to have errors corrected though, so do remember to check for anything out of place on your records.

Account data. Banks, building societies and other organisations compile details of all your payments and transactions on credit/store cards, loans, mortgages, bank accounts and other credit purchases. In theory, they could also hold your record of paying utility bills as well, though some utility firms don't bother to submit data.

The data that credit card companies share about you is increasing. From 1 December 2008, Barclaycard, Capital One, GE Money, HBOS and MBNA began sharing a lot more.

They now share your available credit, actual debts, missed repayment data, whether you repay the minimum, or in full, if you use the credit card for cash advances and if you're on a promotional deal.

These lenders will now have sufficient info to score out those customers who are credit card tarts and play the system using credit card tricks; constantly shifting from one 0% deal to another.

It is possible to improve you credit rating and your credit score, but the first step is staying ahead of the credit card companies, by having a look at your credit record.