The first ever idea of a Credit Score was introduced in the 1950s in the United States. Almost by accident, as Bill Fair and Earl Isaac discovered that a study looking at a potential predictor of ill health could be better used to predict bankruptcy and default. They teamed up to form Fair Isaac, Inc, now FICO, to sell Credit Scores to lenders. FICO scores are now household names by consumers in the US, as they are used extensively, with little competition.
Brief history of credit scoring in the UK
FICO scores came to the UK in 1966 when Barclaycard launched credit cards. The choice was probably influenced by charge card providers Diners Club and American Express, both large American ‘travel and entertainment card’ companies who operated on a small scale in the UK. At the time, Credit Reference Agency information was nothing like it is today, so the scorecards used were based on the information contained in an application form. These scorecards helped drive Barclaycard to become the world’s largest credit card issuer, with over 10m cards issued in the UK.
Although some UK lenders initially used FICO scores, other suppliers of scorecards quickly emerged in the UK, including Scorex, Scoreplus, Equifax and CCN (now Experian). As more data became available from Credit Reference Agencies with the emergence of more detailed Credit Reports, the larger UK lenders also began to develop in-house scorecards, based on samples of the behaviours of their own customers. So, unlike the US, the UK now has many suppliers of Credit Scorecards, and as more and more lenders have tended to move towards developing their own, this has led to many different types of scores, all on different score ranges. There was never any need to compare scores, so as a result there is no universal Credit Score in the UK.
When checkmyfile launched in 2000, it was the first company in the world to make Credit Scores available to consumers online. Until that time, Credit Scores were often quoted as being held in a black box. Even to this day their workings are closely guarded, as they are considered both valuable and commercially sensitive.
From a consumer viewpoint, it’s very handy and convenient to be able to summarise your entire Credit History in one round number, which is a measure of your creditworthiness. Plus, numbers are easier to compare and understand than a fully detailed Credit Report. In theory, if you have a bigger score than mine, your Credit History and Credit Rating must be better than mine. Checkmyfile opened the black box, explaining to consumers how credit scoring worked, and the rest of the world followed, initially by FICO itself, and then by the Credit Reference Agencies in the UK and US.
How Credit Scoring works
Before credit scoring, decisions to lend were made subjectively by real people. Depending on their skill level, mood, level of bias and the day of the week, the results were inefficient. In contrast, Credit Scores can differentiate much more accurately between a loan that is likely to be repaid on time and one that will fall into arrears. Scores are unbiased, work consistently and are much more reliable, as well as being less able to be corrupted and being much faster to come to a decision than a human being, even a skilled one.
Credit Scorecards are created by analysing a large sample of previous accounts to see which answers given in an application form could be predictive of default. These elements are called characteristics. Characteristics that are predictable include age, time at address, time at bank, gender, area of residence, job type, whether a homeowner or renter, type of phone contract, and many more. It is no longer lawful in the UK to use gender in a scorecard. Age is by far the most predictive characteristic. Scorecards can also use characteristics from Credit Reports or from other external sources.
Using probability analysis, the odds of an applicant defaulting with each characteristic can be measured. Then, the overall odds of default can be calculated for any mix of characteristics. The odds can be transformed on to a scale that we now all know as a Credit Score range.
Lenders then work out at what point on that range it is profitable to accept customers. The lower down the range they go (chasing potential customers with lower Credit Scores), the higher the likelihood of default, and the higher the costs of administering the arrears and late payments, and the higher the risk of loss from write-offs. That point is known as the cut-off score. Every lender will have a different cut-off score depending on the appetite for business and the appetite for risk.
Anyone who applies with a Credit Score equal or higher than the cut-off score will normally be accepted. Anyone who scores less will definitely be turned down.
Even those with the best Credit Scores can be declined
If you get a high Credit Score from a company, the thinking can be that you must be guaranteed to be accepted for the credit you’re after. This is not necessarily the case.
Lenders can decline an application without giving you a reason - even if you have a high Credit Score. The rationale may be down to suspicions of fraud, (there are fraud databases in addition to credit databases). More commonly though, the applicant may not meet the lender’s lending criteria.
For example, some credit card issuers will not lend to under 22s, or you may be too old for a mortgage. It’s possible you may live in a jurisdiction where the lender does not operate, such as the Isle of Man or the Channel Islands, but also possibly Northern Ireland or Scotland. Your Credit Report may indicate that you are already heavily committed financially and it would not be socially responsible to increase your debt burden. Or you may be deemed not to earn enough, or be able to afford the commitment sought. All these reasons are completely independent of your credit standing as determined by your Credit Score.
Do all Credit Scores use the same data?
Credit Scores are usually based on a combination of application form data and your Credit History.
There are three different Credit Reference Agencies in the UK (Experian, Equifax and TransUnion) that collect information about your Credit History from their own customers (who are the UK lenders).
Each Credit Scorecard will be different from every other, so not only will different application form data be collected, but often there will be differences in the data provided to the lender by the Credit Reference Agency.
The bottom line is that the Credit Scores produced by different lenders are unlikely to be using exactly the same data, but Credit Scoring is so powerful that the outcome (the prediction of whether you will default or not) will likely be very similar.
Why you need to check your Credit Score
Anyone who has checked their Credit Report will know that the amount of data held by the Credit Reference Agencies is huge and spans a six-year timescale, reported monthly. Credit Report errors are rare, but they do occur and can have devastating consequences.
The only source of checking your data from all UK Credit Reference Agencies is checkmyfile.com. It also has a dispute resolution service which can guide you through the process of putting errors right.
See the bigger picture
If you check your Credit Report and Credit Score using checkmyfile.com, it’s the only place you’ll get credit information from all UK Credit Reporting agencies. This takes away all the hassle of having to look around comparing credit data from different sources. Plus, our carefully calculated Credit Score incorporates this data. This is what we believe makes it the most accurate and informative Credit Score available to UK consumers.
checkmyfile is free for 30 days and then £14.99 a month. You can cancel at any time online, or by phone, secure message or email.