Credit Scoring - What affects it and what to do.

How Credit Scoring Works

Credit Scoring is a systematic structure used by almost all lenders in deciding whether to lend money to you and or at what rate they should charge you. A lender is also likely to investigate your credit history which helps to determine how well you have paid off various bills in the past as well as information about how long you have worked at your job etc. Each various bit of information either increases your score or decreases it, while some points may actually be neutral.
Since your credit history is used to create this credit score, the number essentially becomes the template used by creditors/lenders for an easy numerical system to judge you by. In the past and in some smaller circles, some lenders may rely on "what others say" about an individual's ability to pay back bills. But with bigger lenders they needed a quick and easier method to figure out someone's risk. It is also possible, that within someone's credit history that a lender may consider certain factors more important than others and determine their rates based on these. A credit score is an indication or a guide, it is not a "set in stone" decisive answer for rates and amounts. Some lenders may look more favorable on ones ability to hold a job than others as well as more recent credit history issues compared to older ones. Other issues looked at are someone's age, wealth, and up to as many as 15 to 20 differing factors. Many different factors can be used by a creditor as long as they do not illegally discriminate on ones religion, race, marital status, sex, age etc.

Validity of the Credit Scoring System

While such a system may at times seem very impersonal, biased and not properly reflect a certain individual, for the most part they work fairly well. A good credit scoring system is also very much necessary since processing many applications would be otherwise too difficult and time intensive. Most scoring systems also have over time evolved to become even more precise and give a better indication of ones true risk. While no scoring system can ever be perfect given the nature of the process they definitely are worth while and make a lenders job much easier and impose less risk to them.

Denied Credit

A creditor/lender is not under obligation or under any legal order to tell you how they determine their scoring system, they are required to let you know why you have been denied for credit. This comes under the Equal Credit Opportunity Act (ECOA). So for example, you have been denied credit and it was due to you not having your job for long enough. Then you could re-apply for the same credit once you have had your job for the required time. Another issue is that perhaps your debt to income ratio in their eyes is too risky, then you could over time pay down some of your debt and re-apply later on. Also a good point to keep in mind is that each creditor/lender has their own system for determining ones risk so if you where denied credit at one particular institution, you may very well be accepted elsewhere.
If you have been denied credit due to a poor credit report and you desire, the Fair Credit Reporting Act makes it possible to obtain the name and address of the credit reporting agency with this information. You then could contact the bureau and find out exactly what the report has on it in reference to your bad report. You can obtain this free of charge if you ask for it within 30 days after being denied credit. The credit bureau will tell you what is on your report but it is only the creditor that can give you the information as to why you where ultimately denied any credit.