Note: The Center For Debt Management suggest you Monitor Your Credit Report regularly.
Lexington Law Firm is our preferred choice for fast and effective credit repair. Lexington Law
is reputable and is a member of the BBB. They have a satisfactory record with the bureau.
Credit Scoring
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. Here’s how credit scoring works
in helping decide who gets credit—and why.
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 your bill-paying history,
the number and type of accounts you have, late payments, collection actions, outstanding
debt, and the age of your accounts, is collected from your credit application and your
credit report. Using a statistical program, creditors compare this information to the
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. A total
number of points—a credit score—helps predict how creditworthy you are, that is,
how likely it is that you will repay a loan and make the payments when due.
Because your credit report is an important part of many credit scoring systems, it is
very important to make sure it’s accurate before you submit a credit application. To
get copies of your report, contact the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian: (800) 682-7654
Trans Union: (800) 916-8800
These agencies may charge you up to $8 for your credit report.
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 applicants objectively. Judgmental
methods typically rely on criteria that are not systematically tested and can vary when
applied by different individuals.
How is credit scoring model developed?
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.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain
characteristics—like race, sex, marital status, national origin, or religion—as
factors. However, creditors are allowed to use age in properly designed scoring systems.
But any scoring system that includes age must give equal treatment to elderly applicants.
What can I do to improve my score?
Credit scoring models are complex and often vary among creditors and for
different types of credit. If one factor changes, your score may change—but
improvement generally depends on how that factor relates to other factors considered by
the model. Only the creditor can explain what might improve your score under the
particular model used to evaluate your credit application. Nevertheless, scoring models
generally evaluate the following types of information in your credit report:
- Have you paid your bills on time? Payment history typically is a significant
factor. It is likely that your score will be affected negatively if you have paid bills
late, had an account referred to collections, or declared bankruptcy, if that history is
reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate the amount of debt
you have compared to your credit limits. If the amount you owe is close to your credit
limit, that is likely to have a negative effect on your score.
- How long is your credit history? Generally, models consider the length of your
credit track record. An insufficient credit history may have an effect on your score, but
that can be offset by other factors, such as timely payments and low balances.
- Have you applied for new credit recently? Many scoring models consider whether
you have applied for credit recently by looking at "inquiries" on your credit
report when you apply for credit. If you have applied for too many new accounts recently,
that may negatively affect your score. However, not all inquiries are counted. Inquiries
by creditors who are monitoring your account or looking at credit reports to make
"prescreened" credit offers are not counted.
- How many and what types of credit accounts do you have? Although it is generally
good to have established credit accounts, too many credit card accounts may have a
negative effect on your score. In addition, many models consider the type of credit
accounts you have. For example, under some scoring models, loans from finance companies
may negatively affect your credit score.
Scoring models may be based on more than just information in your credit report. For
example, the model may consider information from your credit application as well: your job
or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on
time, paying down outstanding balances, and not taking on new debt. It’s likely to
take some time to improve your score significantly.
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, credit
scoring systems must be based on a big enough sample. Remember that these systems
generally vary 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. And 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?
If you are denied credit, the Equal Credit Opportunity Act requires that the creditor
give you a notice that tells you the specific reasons your application was rejected or the
fact that you have the right to learn the reasons if you ask within 60 days. Indefinite
and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable
reasons include: "Your income was low" or "You haven’t been employed
long enough." Unacceptable reasons include: "You didn’t meet our minimum
standards" or "You didn’t receive enough points on our credit scoring
system."
If a creditor says you were denied credit because you are too near your 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.
Sometimes you can be denied credit because of information from a credit report. If so,
the Fair Credit Reporting Act requires the creditor to give you the name, address and
phone number of the credit reporting agency that supplied the information. You should
contact that agency to find out what your report said. This information is free if you
request it within 60 days of being turned down for credit. The credit reporting agency can
tell you what’s in your report, but only the creditor can tell you why your
application was denied.
If you’ve been denied credit, or didn’t get the rate or credit terms you
want, ask the creditor if a credit scoring system was used. If so, ask what
characteristics or factors were used in that system, and the best ways to improve your
application. If you get credit, ask the creditor whether you are getting the best rate and
terms available and, if not, why. If you are not offered the best rate available because
of inaccuracies in your credit report, be sure to dispute the inaccurate information in
your credit report.
Note: The Center For Debt Management suggest you Monitor Your Credit Report regularly.
Lexington Law Firm is our preferred choice for fast and effective credit repair. Lexington Law
is reputable and is a member of the BBB. They have a satisfactory record with the bureau.
| 
