Like It Or Not, You Have A Score To Settle! (Part 1 of 2 on
Credit Scoring) by http://www.creditandyou.com
Just when most people finish with school and can stop worrying
about test scores, there’s a new kind of scoring that enters the
picture. It’s called credit scoring. And, its impact on your
financial future can mean more to you than a college degree.
You may never know your precise credit score, but you need to
know if you’re at risk! Credit Scoring … Why It’s So
Important: Ever wonder how a creditor decides whether to grant
you credit? For years, creditors have been using credit scoring
systems to determine if you’d be a good risk for credit cards
and auto loans. More recently, credit scoring has been used to
help creditors evaluate your ability to repay home mortgage
loans.
Precisely what is credit scoring?
Credit scoring is a system creditors use to help determine
whether to give you credit. Information about you and your
credit experiences, such as bill-paying history, the number and
type of accounts you have, late payments, collection actions,
outstanding debt, and age of your accounts is collected from
credit applications and your credit report.
Using a statistical program, creditors compare this information
to the credit performance of consumers with similar profiles. A
credit scoring system awards points for each factor that helps
predict who is most likely to repay a debt. Total number of
points (credit score) helps predict how creditworthy you are;
how likely it is that you will repay a loan and make payments
when due.
You may never know your precise credit score, but you need to
know if you’re at risk!
Why is credit scoring used?
Credit scoring is based on real data and statistics, so it
usually is more reliable than subjective or judgmental methods.
It treats all applications objectively. Judgmental methods
typically rely on criteria that are not systematically tested
and can vary when applied by different individuals. To develop a
model, a creditor selects a random sample of its customers (or a
sample of similar customers if their sample is not large
enough), and analyzes it statistically to identify
characteristics that relate to creditworthiness. Then, each of
these factors is assigned a weight based on how strong a
predictor it is of who would be a good credit risk.
Each creditor may use its own credit scoring model, different
scoring models for different types of credit, or a generic model
developed by a credit scoring company. How reliable is the
credit scoring system?
Credit scoring systems enable creditors to evaluate millions of
applicants consistently and impartially on many different
characteristics. But to be statistically valid, credit scoring
systems must be based on a big enough sample. Remember that
these systems generally very from creditor to creditor. Although
you may think such a system is arbitrary or impersonal, it can
help make decisions faster, more accurately, and more
impartially than individuals when it is properly designed.
In fact, many creditors design their systems so that, in
marginal cases, applicants whose scores are not high enough to
pass easily, or are low enough to fail absolutely are referred
to a credit manager who decides whether the company or lender
will extend credit. This may allow for discussion and
negotiation between the credit manager and the consumer. What
happens if you are denied credit or don’t get the terms you want?
For the answer to that crucial question and how to improve your
credit score, be sure to read Part II of “Like It Or Not, You
Have A Score To Settle.”
Credit and You are a group of expert on credit and the authors
of “CREDIT AND YOU … Secrets To Improving Your Credit Rating.”
Feel free to pass this article along to family and friends. And
be sure to pick up your FREE 7 day course on “Credit Basics” at
http://www.creditandyou.com
Copyright © 2002-2003 Credit and You | All Rights Reserved |
Like It Or Not, You Have A Score To Settle! (Part 2 of 2 on
Credit Scoring) by Credit and You.com
In part 1, we covered the basics about credit scoring – what it
is and how it is calculated. It’s time to address the critical
question …
What happens if you are denied credit or don’t get the terms you
want?
The Equal Credit Opportunity Act requires that the creditor
give you a notice either with the specific reasons your
application was rejected, or stating that you have the right to
learn the reasons if you ask within 60 days.
NOTE: Indefinite and vague reasons for denial are illegal, so
ask the creditor to be specific. If you were denied credit
because you are too near you credit limits on your charge cards,
or you have too many credit card accounts, you may want to
reapply after paying down your balances or closing some
accounts. Credit scoring systems consider updated information
and change over time. You also can be denied credit because of
information from a credit report. If so, the Fair Credit
Reporting Act requires the creditor to give you the name,
address and phone number of the credit reporting agency that
supplied the information. You should contact that agency to find
out what your report contains.
NOTE: This information is free if you request it within 60 days
of being turned down for credit. The credit reporting agency can
tell you what’s in your report, but only the creditor can tell
you why your application was denied. If you’ve been denied
credit, or didn’t get the rate or credit terms you want, ask the
creditor if a credit scoring system was used. Be sure to ask
what characteristics or factors were used in that system, and
the best ways to improve you application.
If you get credit, ask the creditor whether you are getting the
best rate and terms available and, if not, why. If you are not
offered the best rate available because of inaccuracies in your
credit report, be sure to dispute the inaccurate information in
your credit report. Under the Equal Credit Opportunity Act, a
credit scoring system may not use certain characteristics like:
Race, Sex, Marital status, National origin, or Religion.
However, creditors are allowed to use age in properly designed
scoring systems. But any scoring system that includes age must
give equal treatment to elderly applicants. What can I do to
improve my score?
Credit scoring models are complex and often vary among
creditors, and for different types of credit. If one factor
changes, your score may change. But improvement generally
depends on how that factor relates to other factors considered
by the model.
NOTE: Only the creditor can explain what might improve your
score under the particular model used to evaluate your credit
application. Nevertheless, scoring models generally evaluate the
following types of information in your credit report: • Have you
paid your bills on time? Payment history is a significant
factor. It is likely that your score will be affected negatively
if you have paid bills late, had an account referred to
collections, or declared bankruptcy, if that history is
reflected on your credit report.
• What is your outstanding debt? Many scoring models evaluate
the amount of debt you have compared to your credit limits. If
the amount you owe is close to your credit limit, that is likely
to have a negative effect on your score.
• How long is your credit history? Generally, models consider
the length of your credit track record. An insufficient credit
history may have an effect on your score, but that can be offset
by other factors, such as timely payment and low balances.
• Have you applied for new credit recently? Many scoring models
look at inquiries” on your credit report when you apply for
credit. If you have applied for too many new accounts recently,
that may negatively affect your score. However, not all
inquiries are counted. Inquiries by creditors who are monitoring
your account or looking at credit reports to make “prescreened”
credit offers are not counted.
• How many and what type of credit accounts do you have?
Although it is generally good to have established credit
accounts, too many credit card accounts may have a negative
effect on your score. In addition, many models consider the type
of credit accounts you have. For example, under some scoring
models, loans form finance companies may negatively affect your
credit score. Scoring models may be based on more than just
information in your credit report. For example, the model may
consider information from your credit application as well: your
job or occupation, length of employment, or whether you own a
home. Bottom Line: To improve you credit score under most
models, concentrate on paying your bills on time, paying down
outstanding balances, and not taking on new debts. It’s likely
to take some time to improve your score significantly.
Credit and You are a group of expert on credit and the author of
“CREDIT AND YOU … Secrets To Improving Your Credit Rating.”
Feel free to pass this article along to family and friends. And
be sure to pick up your FREE 7 day course on “Credit Basics” at
http://www.creditandyou.com.
Copyright © 2002-2003 Credit and You | All Rights Reserved |