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Credit score

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A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.

FICO is a publicly-traded corporation (under the ticker symbol FICO) that created the best-known and most widely used credit score model in the United States. Here is a percentage breakdown of a FICO score: •35% - Payment History •30% - Debt Ratio •15% - Length of Credit History •10% - Types of Credit •10% - Number of Credit Inquiries

Contents

Score Interpretation

One first has to determine exactly what type of score one is referring to. There are numerous scores sold in the marketplace. FICO produces scores used by TransUnion and Equifax and has been a score developer the longest. Experian has abandoned this scoring model and relies on their less-popular "PLUS" system. The 3 companies also use VantageScore, a competing score technology to FICO. Finally, there are other scoring systems such as TransUnion's "TransRisk" or Experian's "ScoreX". These are educational scores in that while not used by lenders for underwriting loans, they do provide insight into how scores are calculated.

In the United states, FICO Credit scores range from 300-850, with 723 being the median FICO score of Americans. FICO scores below 600 are considered high risk borrowers, 620 being the dividing line between good and bad, 640 or above being "pretty good", 650 as average general credit-use behavior, and above 690 or 720 being excellent.[1] Scores are based on payment history, outstanding debts, credit history, new credit, and credit in use.[2] In addition, Experian's PLUS score system ranges from 330-830, and the VantageScore ranges from 501-990. The variations can be easily confusing to consumers.[3][4][5][6]

Australia

In Australia, credit scoring is widely accepted as the primary way applicant creditability is assessed. Credit scoring is not only used to determine whether credit should be approved to an applicant, but credit scoring is also used in the setting of credit limits on credit cards/store cards, in behavioral modeling such as collections scoring, and also in the pre-approval of additional credit to a company's existing client base.

Although logistic (or non-linear) probability modeling is still the most popular means by which to develop scorecards, various other methods offer extremely powerful alternatives, including MARS, CART, CHAID, and random forests.

Canada

The system of credit reports and scores in Canada is very similar to that in the United States, with two of the same reporting agencies active in the country: Equifax and TransUnion (Experian, which had entered the Canadian market with the purchase of Northern Credit Bureaus in 2008, announced the closing of its Canadian operations as of April 18, 2009)[7].

There are, however, some key differences. One such difference is that, unlike the United States, where a consumer is allowed only one free copy of their credit report a year, in Canada, the consumer may order a free copy of their credit report any number of times in a year, as long as the request is made in writing, and as long as the consumer asks for a printed copy to be delivered by mail.[8][9] This request by the consumer is noted in the credit report, but it has no effect on their credit score. According to Equifax's ScorePower Report, FICO scores range between 300 and 900.

The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score.[10] This publication provides sample credit report and credit score documents, with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online at the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.

India

The Credit Information Bureau (India) Limited (CIBIL) was incorporated in 2000 by the Government of India and the Reserve Bank of India to provide credit information about commercial and consumer borrowers to a limited group of members, including banks, financial institutions, non banking financial companies, housing finance companies and credit card companies.

Norway

In Norway, credit scoring services are provided by three credit scoring agencies: Dun & Bradstreet, Experian and Lindorff Decision. Credit scoring is based on publicly available information such as demographic data, tax returns, taxable income and any Betalingsanmerkning (non-payment records) that might be registered on the credit scored individual. Upon being scored, an individual will get a notice (written or in the form of an e-mail) from the scoring agency stating who performed the credit score as well as any information provided in the score. In addition, many credit institutions use custom made scorecards based on any number of parameters.

South Africa

Credit scoring is used throughout the credit industry in South Africa, with the likes of banks, micro-lenders, clothing retailers, furniture retailers, specialised lenders and insurers all using credit scores. Currently two of the three main retail credit bureaux offer credit bureau scores. TransUnion (formerly ITC) offer the Empirica Score which is, as of mid 2010, in its 4th generation. The Empirica score is segmented into two suites: the account origination (AO) and account management (AM). Experian South Africa likewise have a Delphi credit score with their forth generation about to be released (late 2010).

Sweden

Sweden also has a system for credit score. This system aims to find people with bad payment attitude. It has only two levels, good and bad. Anyone who does not pay a requested debt payment on time, and also not after a reminder, will have their case forwarded to the Swedish Enforcement Administration (Swedish: Kronofogdemyndigheten), a national authority which collects debts. The very appearance of a company as a debtor in this authority, will render a mark among private credit bureaus - however, this does not apply to a private person. This mark is called Betalningsanmärkning (non-payment record) and can according to the law be stored for three years for a private person and five years for a company. This kind of non-payment record will make it very difficult to get a loan, a rental apartment, a telephone subscription or a job with cash handling. The banks of course use income and asset figures in connection with loan assessments.

If one gets an injunction to pay by the Enforcement Administration, it is possible to object to it. Then the one requesting the payment must show the correctness in district court. Failure to object is seen as admitting the debt. If the debtor loses the court trial, costs for the trial are added to the debt. Taxes and authority fees must always be paid on request unless payment has already been made.

Every person with a Swedish national identification number must register a valid address, even if living abroad, since sent letters are considered to have arrived. For example, the Swedish astronaut Christer Fuglesang has a Betalningsanmärkning since he forgot to pay the Stockholm congestion tax, and had an old invalid address registered, since he lives in the USA. Letters with payment requests did not reach him on time.

United Kingdom

See also: Credit scorecards

The most popular statistical technique used is logistic regression to predict a binary outcome, such as bad debt or no bad debt. Some banks also build regression models that predict the amount of bad debt a customer may incur. Typically, this is much harder to predict, and most banks focus only on the binary outcome.

Credit scoring is closely regulated by the Financial Services Authority.

It is very difficult for a consumer to know in advance if they have a high enough credit score to be accepted for credit with a particular lender. This is due to the complexity and structure of credit scoring, which differs from one lender to another.

Also, lenders do not have to reveal their credit score head, nor do they have to reveal the minimum credit score required for the applicant to be accepted. Simply due to this lack of information to the consumer, it is impossible for him or her to know in advance if they will pass a lender's credit scoring requirements.

If the applicant is declined for credit, the lender is also not obliged to reveal the exact reason why.

United States

Main article: Credit score (United States)

In the United States, a credit score is a number based on a statistical analysis of a person's credit files, that in theory represents the creditworthiness of that person, which is the likelihood that people will pay their bills. A credit score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax. Income is not considered by the major credit bureaus when calculating a credit score.

There are different methods of calculating credit scores. FICO, the most widely known type of credit score, is a credit score developed by FICO, previously known as Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. The credit bureaus all have their own credit scores: Equifax's ScorePower, Experian's PLUS score, and TransUnion's credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models.

Studies have shown scores to be predictive of risk in the underwriting of both credit and insurance.[11][12][13] Some studies even suggest that most consumers are the beneficiaries of lower credit costs and insurance premiums due to the use of credit scores.[12][14]

Americans are entitled to one free credit report within a 12-month period from each of the three credit bureaus but are not entitled to receive a free credit score. The three credit bureaus run Annualcreditreport.com, where users can get their free credit reports. Credit scores are available as an add-on feature of the report for a fee. If the consumer disputes an item on a credit report pulled using the free system, the credit bureaus, under the Fair Credit Reporting Act (FCRA) now have 45 days to investigate, rather than 30 days for reports obtained otherwise.[15]

Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their FICO score directly from Fair Isaac.[16] Credit scores (including FICO scores) are also made available for "free" through subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores for free from most such services, one must use their credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge. However, myFICO.com no longer allows you to cancel before 3 months of charges have been completed. Until March 2009, holders of credit cards issued by Washington Mutual were offered a free FICO score each month through the bank's Web site. (Chase, which took over Washington Mutual in 2008, discontinued this practice in March, 2009.)[17]Chase resumed the practice of offering a free FICO score in March, 2010 of select card members to the exclusion of the majority of former WAMU card holders.

Under the Fair Credit Reporting Act, a consumer is entitled to a free credit report (but not a free credit score) within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit rating. Under the Wall Street reform bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit rating. [18]

The FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.[19]

See also

References

  1. ^ What is a good credit score?
  2. ^ What is a credit score?
  3. ^ No More Experian FICO Scores
  4. ^ Fake-O FICO Funk
  5. ^ Economical Approach to Staying on Top of Your Credit Scores and Reports
  6. ^ My True Credit Score / FICO Score
  7. ^ [1] Experian (Canada)
  8. ^ Equifax form (Canada)
  9. ^ TransUnion form (Canada)
  10. ^ Understanding Your Credit Report and Credit Score (Canada)
  11. ^ Report to the Congress on credit scoring and its effects on the availability and affordability of credit
  12. ^ a b Credit-based insurance scores: Impacts on consumers of automobile insurance
  13. ^ No evidence of disparate impact in Texas due to use of credit information by personal lines insurers
  14. ^ An overview of consumer data and credit reporting
  15. ^ Equifax Credit Report Dispute FAQs retrieved on 2008-12-18
  16. ^ FICO scores retrieved on 2008-12-18
  17. ^ Chase drops WaMu secured card, FICO score retrieved on 2009-01-17
  18. ^ President Obama on Final Passage of Wall Street Reform: An End to Bailouts, a Beginning for Accountability published July 15, 2010, retrieved on July 26, 2010.
  19. ^ The VantageScore Model retrieved on 2008-12-16

External links

  • "FTC Guide to Credit Scores". http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm. 
  • "Financial Consumer Agency of Canada". http://www.fcac.gc.ca. 
  • "How Credit Scores Work". http://money.howstuffworks.com/credit-score.htm. 
  • "Credit Research Centre Credit Scoring Conference". http://www.crc.man.ed.ac.uk/conference/. 
  • "UK Credit Scoring Resource". http://www.creditreport.org.uk/. 
  • "How Credit Scores Drop". http://www.spendonlife.com/blog/flush-your-credit. 
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It uses material from the Wikipedia article "Credit score"