|
Like It Or Not, You Have A Score To Settle! (Part 1 Of 2 On Credit Scoring)
By: 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 the picture. It’s called
credit scoring. And, its impact on your financial future can mean more to you
than a college degree.
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, 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, the 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 the credit
performance of consumers with similar profiles. A scoring system awards points
for each factor that helps predict who is most likely to repay a debt. Total
number of points helps predict how creditworthy you are; how likely it is that
you will repay a loan and make payments when due.
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 scoring model, different scoring models for
different types of credit, or a generic model developed by a credit scoring
company.
How reliable is the 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, 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 the company
or lender will extend credit. This may allow for discussion and negotiation
between the credit manager and the consumer.
What happens if you are denied credit or don’t get the terms you want?
About the Author:
For the 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.” At http://www.creditandyou.com/creditscoreexplained.html
|
