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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. |
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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 (formerly TRW): (800) 682-7654
- Trans Union: (800) 916-8800
These agencies may charge you up to $8.00 for your credit report.
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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. |
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How Is A 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.
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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. |
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