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Credit Scoring What is credit scoring? Basically, it is the use of a statistical model to objectively evaluate all of the information available to make a credit decision. Credit, or FICO (the trademark of Fair Isaac and Company, a risk assessment company), scores are calculated by a system of scorecards. In developing these scorecards, credit date on millions of consumers is used, and complex mathematical methods are applied to perform extensive research into credit patterns that forecast credit performance. Through this process, Fair Isaac identifies distinctive credit patterns, with each pattern corresponding to a likelihood that a consumer will make his or her loan payments, as agreed, in the future. The score is based on all the credit-related data in the credit report, NOT just negative data, such as missed payments or bankruptcies. These scores do not use race, color, religion, national origin, sex, marital status, age, occupation or length of time in your present home as predictive characteristics. Taking the mystery out of credit scoring Top ten reasons why a consumer’s credit did not score as highly as possible, listed in order of severity:
What’s important and what’s not Breakdown of weight given to general areas of your credit report:
The older and more isolated the occurrence of delinquencies, the less the risk. For instance, a 30-day late payment that is only one month old indicates higher risk than a 30-day late payment made 3 years ago. Similarly, someone who missed a couple of payments in the last 2 months would be a higher risk than someone with a much older, yet more severe delinquency. Additionally, a line of credit from a finance company is looked upon more negatively than one from a bankcard, travel and entertainment card, oil card or automobile loan. (consumers who obtain loans through finance companies often do so because they cannot obtain credit from less expensive sources.) The optimum number of bankcards for a consumer to possess is three. Inquiries into your credit that are run for the purposes of marketing by a bank, pre-approved credit solicitations, or managing existing accounts are not used to calculate your credit score. Inquiries you make through one of the credit reporting repositories are also not used to calculate your score. Employer/employee inquires do not count against your credit score. Multiple inquiries in a single month for mortgage or automobile loans only count as one inquiry. Why can the three scores each be different? The three credit reporting repositories, Equifax, Experian and TransUnion, each have different information on an individual reported to them. Not all trade lines report to all three repositories. The fact that the three repositories rank an individual differently does not mean that one or all are wrong. The objective of the score model is to rank order by risk, based on the information in the individual repository. Accuracy of data is essential in a credit file for score models to predict risk effectively. If there are significant errors that may improve your score, you can utilize rapid-recheck or dispute those errors directly with the repositories. The repositories Here’s the contact information for each of the credit reporting repositories: Equifax Experian TransUnion |
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