Turning your credit report into your credit score

by Chris McGuckin

A recent Which? article suggested that nearly two out of three (63%) of adults have never checked their credit report. The £2 statutory report gives access to the data that Experian, and other credit reference agencies, holds about an individual. However, the availability of this information doesn’t necessarily give individuals a better understanding of how the credit report is turned into a credit score.

A consumer credit report will list the credit accounts that are currently being used, as well as ones that have recently closed. It will list previous applications for credit, tell you if you’re registered at your address on the electoral roll – but it doesn’t tell you what is good, what is bad, and how this is rolled up into a credit score.A common misconception is that you have a single credit score, provided to lenders by Experian, or that Experian makes the decision to accept or decline you on behalf of these lenders. This isn’t the case.

At Experian Decision Analytics, we work with a number of different lenders who each have different products, priorities and portfolios of accounts. As a result, each lender will have a different idea of what is considered to be a good risk or a bad risk. We work closely with our clients to help them create bespoke scorecards best suited to their own set of customers. Ultimately, the lender will make a decision about whether to accept an application for credit based on this score, in conjunction with other considerations such as affordability, or identity authentication.

Scores are based on an accumulation of the information in your credit report. The difference in what you see on your report and what is used, however, is that the information is summarised to allow statistical analysis to determine what aspects of your report contribute to being a good and bad credit risk, that is – can this information be used to predict whether you’re likely to pay back the borrowed money, or not?

For example, your report will give you an account-by-account breakdown of your accounts – which lenders you hold accounts with, when they were opened, what your historical balances are.  However, it is difficult to turn this level of information into an assessment of your credit worthiness.

So, your credit report will get summarised into a list of variables which can be calculated for everyone, looking across all of the information available: how many active accounts do you have? How many settled accounts do you have? What is your overall outstanding balance? Have you missed any payments recently?

This summarised data can then be used to categorise groups of risk – are people with lots of active accounts more risky than people with no accounts? Analysis of this data results in a scorecard, which can be used to assess all applications based on the same criteria. Scorecards are discussed in this previous article.

Each lender will give different weight to different pieces of information – having high existing balances might be more important for one, whereas having a history of settling previous agreements might be important for another.

Ultimately, although your credit risk and your credit score will be viewed differently by different lenders, the underlying principle that governs these scores is that the past can be used to predict the future – if you have missed payments in the past, you are more likely to miss payments in the future. Within this, the recent past has more relevance to your future ability to pay than older issues.

The depth of your credit report can also be a factor – there needs to be enough information in your report to make a reliable decision. Even though you may not have any negative aspects in your credit history, if there is not enough positive evidence then you are unlikely to get a very high score.

If you are new to credit, and have a ‘thin’ credit file, or if you have had credit in the past but it is no longer on record – given data is stored for no longer than six years – then it can be hard to get credit. In these cases, your chances of being accepted can be improved if you apply for further credit with a lender who you have existing accounts with as they may have more data to base a credit assessment on – for example, wherever you hold your current account, or other financial products. Not all information is supplied to credit reference agencies, so if a lender has access to more information about you it can help.

So, when reviewing a credit report a lender will consider whether there is enough information available to make an informed decision, and whether, based on the information available, if they can ascertain whether an applicant is likely to pay them back. For a consumer to build their credit score, they need to ensure that both of these aspects are covered.