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
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, 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 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 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 company or lender will extend credit. This may allow for discussion and negotiation between credit manager and consumer. What happens if you are denied credit or don’t get terms you want?
For 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 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 basics about credit scoring – what it is and how it is calculated. It’s time to address critical question ...
What happens if you are denied credit or don’t get terms you want?
The Equal Credit Opportunity Act requires that creditor give you a notice either with specific reasons your application was rejected, or stating that you have right to learn reasons if you ask within 60 days.
NOTE: Indefinite and vague reasons for denial are illegal, so ask 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, Fair Credit Reporting Act requires creditor to give you name, address and phone number of credit reporting agency that supplied information. You should contact that agency to find out what your report contains.
