How is my company’s credit score calculated?
One of my suppliers told me that a leading credit reference agency holds a poor credit score on my business. My business is in pretty good shape, so I’d like to know how credit referencing agencies reach the conclusions they do?
A. Martin Williams writes:
Credit scoring is not an exact science, which is probably why so many consumers and commercial enterprises find the whole business of credit ratings a mystery.
Let's start with some basics about what credit rating agencies actually store on their databases. To create the skeleton of any credit information database in the UK, all credit agencies buy in information from official sources like Companies House (where you can find statutory financial accounts, shareholder and director details) and the Registry Trust (the body that collects and stores County Court Judgment data).
The next step is to supplement official information with trade directory data so that the whole population of private businesses, as well as incorporated companies, is covered.
However, credit reference agencies try to be different from each other by topping up their databases with other proprietary information using their own unique collection techniques, such as interviewing companies by phone or gathering information by sending questionnaires.
Depending on the information on each database, you can start to see why credit scores might start to vary considerably. At any one time, one leading agency might give a business a good score, while another one rates you down.
The illustration below gives a consensus view from the four leading credit agencies (Graydon, Experian, D&B and Equifax) as to what business characteristics are taken into credit scoring systems. One thing is very clear – an absence of information on your credit file is often worse than negative data, especially if you are a new, growing business.
I recommend that you make sure the leading agencies have at least some information on your file if getting credit from your trade suppliers is vitally important to your business. Even if you don't have a track record yet because your business is a start-up, write to the agencies and tell them something that might make a difference; information on line of business, number of employees or start-up capital could do the trick for you.
Sometimes this information may not in itself be enough to change the agency's credit rating, but buyers of credit reports from the agency may read the contents of your expanded report and feel more confident about making their own credit decision rather than relying purely on the report's score. Transparency is the key!
Leading credit reference agencies use data from multiple sources to provide robust predictive scoring; elements typically used include… The above graphic illustrates a sample of different weightings that can be applied to different sources.
[Image: Graydon, Experian, D&B and Equifax]
Martin Williams is managing director of credit referencing agency Graydon, is a fellow of the Institute of Credit Management and has over 30 years of experience in the credit industry. www.graydon.co.uk