New Concepts In Credit Scoring

Nick Telford

Did you ever think that applying for a car loan would require scoring well on a test that you've been taking for years but never really studied for? Scores are how creditors determine your creditworthiness and the likelihood that they are going to give you a loan.

Credit scoring was first developed in the 1950s, but over the last couple of decades, it has become more sophisticated and a crucial part of seeing whether giving you money is worth the risk.

All three major credit agencies (Experian, Equifax and Trans Union) worked to develop a generic scoring system based solely on the information reported to them about an individual. Credit scoring is a scientific method that uses statistical models to assess an individual's credit worthiness based on their credit history and current credit accounts.

When you apply for a mortgage, a car loan, a student loan, and a credit card or in some cases even employment, the offering company can order a copy of your credit report.

While each credit agency has a common value system for their scores, how they tabulate the scores is individual to each company based on the data in their system. It's also worth noting that all three are not uniform in how much information is reported to them or requested from them.

While all three are accessible, information for a particular creditor may only be reported to one of the agencies. So if Equifax has a positive report from Company A, you might not find that same report at Experian or Trans Union.

So when a score is requested, a computer compiles it by using information from an individual's credit report, such as how much money is owed and whether payments have been made on time.

Then that score is compared to the credit performance of others with similar profiles. The system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points per credit score helps predict how likely it is that you will repay a loan and make payments on time.

Credit scores range from 375 to 900 points, but those numbers mean little on their own. The numbers really don't mean much without knowing what the specific sliding scale You can assume that you are a better credit risk the higher your score is. Under mortgage standards, a score of 650 or higher indicates an excellent credit risk and good credit history.

A score below 620 may prevent a borrower from getting the best interest rates, as they may be considered a greater credit risk-but it does not mean that they can't get credit. The process will probably be lengthier and, as noted, the terms may be less appealing, but often credit can still be obtained.

While the credit scoring system is far from perfect, it is under improvement all the time. With the Fair Credit Reporting Act going into effect, people will actually have more access to their own credit histories without having to pay for it.

The act also requires agencies to respond to requests for investigation of dubious items on the credit history. In years past, it was not uncommon to write letter after letter and never receive an answer. Come September that will all change.
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