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Inside the black box: how your credit score is calculated

Updated: Jan 31

How is your credit score calculated?

Everyone knows that there’s a formula, but what isn’t very well known is how the formula works.


The formula is something like ‘X’ + a*Y + b*Z…

X is a fixed number - say 500, or 600 or 700 (I’ll get to this in a second).

Y and Z are variables like total number of hard searches, number of defaults etc. In total there are 125 such variables, so it’s not just Y and Z - it’s 125 such variables.

a and b are the weights attached to the variables.

You always knew this was complicated, right? No surprises there.


What is a surprise is this: what you start with - the ‘X’ - in the equation is vastly different depending on your credit history.


There are 4 starting points:

The worst - those who have so-called ‘Derogatory Status’. Anyone with a CCJ, IVA or

Bankruptcy on record in the past 6 years, or anyone with a current status of ‘8’ on an existing facility. (8 means you’re in default).


The new to credit - those who have so-called ‘New To Credit Status’. That’s anyone who has 2 or fewer entries on their credit file.


The active and limited active - these are the most ‘normal’ categories and capture the bulk of the population.


X - the starting point - is highest for limited active, followed by active, followed by new to credit, and finally, the worst starting point is to have a derogatory status.


The way your credit score is calculated is by taking your starting point - X - and then adding + or - for the 125 variables.


Each variable has a minimum and a maximum possible score, which is different depending on what category you are in. Yes, that’s correct. the minimum and maximum score you can get on each of the 125 variables is different depending on whether you’re in the ‘derogatory’ category, vs ‘active’ category, vs ‘limited active’ or ‘new to credit’. So, it turns out, which category you’re in is hugely important.


Lesson? This: don’t default. Don’t end up in ‘derogatory’ category - it’ll screw your credit score - and lenders willingness to lend to you - for a very, very long time.


Oh, other lesson - if you’re new to the UK, quickly get out of the new to credit category and into active. If you follow the tips I gave you in another blog post, you can do this in anywhere from 6-12 months.

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