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New Concepts In Credit Scoring
By: John Simpson
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.
About the Author:
John Simpson works in software development. A few years ago, he got in trouble
with credit card debts. Now he's written a series of articles explaining how he
recovered, and repaired his credit. Find out how to repair your credit. Discover
why a good credit report is vital to your financial future, and how to make it the best Click http://www.credit-repair-101.com/ |
