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Credit scores are numeric values that rank the risk of
default by an individual according to their credit history at a given point in
time. Your score is based on your past payment history, the amount of credit you
have outstanding, the amount of credit you have available, and other factors.
Credit scores have proven to be a very good predictor of whether a borrower will repay his or her loan.
Currently, NONE of the credit bureaus
allow ANY company to provide or sell FICO/risk/credit scores directly to
consumers.
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 your bill-paying
history, the number and type of accounts you have, late payments, collection
actions, outstanding debt, and the age of your accounts, is collected from your
credit application 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. A total number of points -- a
credit score -- helps predict how creditworthy you are, that is, how likely it
is that you will repay a loan and make the payments when due. Because your credit report is an important part of many
credit scoring systems, it is very important to make sure it's accurate before
you submit a credit application.
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 applicants
objectively. Judgmental methods typically rely on criteria that are not
systematically tested and can vary when applied by different individuals.
How is a Credit Scoring model developed?
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.
Under the Equal Credit Opportunity Act, a credit scoring
system may not use certain characteristics like -- race, sex, marital status,
national origin, or religion -- as factors. 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.
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