Credit Score
In the United States, a credit score is a number typically between 300 and 850, based on a statistical analyses of a person’s credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her bills.
In the United States, a credit score is a number typically between 300 and 850, based on a statistical analyses of a person’s credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her bills. A credit score is primarily based on credit report information, typically from the three major credit reporting agencies.
Lenders, such as banks and credit cards companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. While the most widely known score in the U.S. is FICO, there are many others, such as NextGen and VantageScore.
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Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:
35%, punctuality of payment in the past.
30%, the amount of debt, expressed as the ratio of current revolving debt to total available revolving credit.
15%, length of credit history.
10%, types of credit used.
10%, recent search for credit and amount of credit obtained recently.
Fair Isaac does not use the same scorecard for everyone. The scorecards are segmented so that there are over 100 different scoring models that are applied to different individuals based on different ranges of input values. The implication of this segmentation are that while the approximate weighted contribution above may be an average across all scorecards, individuals receive different scores or weightings based on the scorecard segmentation in which they fall. Some consumers have noticed their scores decreasing by small amounts for no apparent reason.
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A FICO score generally ranges from 300 to 850. It exhibits a left-skewed distribution with a US median around 725. Generally, 660 is regarded as potentially sub-prime and represents and important break point for credit worthiness. The performance of the scores is monitored and the scores are periodically aligned so that a credit grantor normally doesn’t need to be concerned about which scorecard was employed.
Each individual has three credit scores for any given scoring model because the three credit agencies have their own, independent databases. These databases are independent of each other and may contain entirely different data. Many lenders will check an applicant’s score from each bureau and use the median score to determine the applicant’s credit worthiness.
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FICO is an acronym for Fair Isaac Corporation and refers to the best-known credit score in the U.S. The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in one’s credit file. The FICO score is primarily used in the consumer banking and credit industry. Banks and other institutions that use scores as a factor in their lending decisions may deny credit, charge higher interest rates, or require more extensive income and asset verification if the applicant’s credit score is low.
FICO scores are designed to indicate the likelihood that a borrower will default. No public information is available to determine what the scores mean in terms of statistics. A separate score, BNI is used to indicate likelihood of bankruptcy.
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The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. This publication provides sample credit report and score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. Paper copies can also be ordered at no charge for residents of Canada.
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As a result of the FACT Act, each legal U.S. resident is entitled to one free copy of their credit report from each credit reporting agency once every twelve months. This information is available at the government-sanctioned but credit reporting agency-operated AnnualCreditReport.com. To guard against inaccurate information or fraud more often than yearly, one can request a report from a different credit reporting agency each four months. However, the free report doesn’t contain a credit score. A credit score may be purchased at the time of access for a nominal charge. Requesting a credit report will subject you to pre-screened offers of credit cards. To prevent all three credit bureaus from making your address available to credit card companies for this purpose, you may opt.
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Credit history or report is, in many countries, a record of an individual or company’s past borrowing and repaying, including information about late payments and bankruptcy. When a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to a credit bureau, along with constant updates on the status of their credit accounts, address or any other changes you may have made since the lat time they applied for any credit.
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Adverse Credit History, also called sub-prime credit history, non-status credit history, impaired credit history, poor credit history and bad credit history, is a negative credit rating. A negative credit rating is often considered undesirable to lenders and other extenders of credit for the purposes of loaning money or capital.
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Credit history is typically local to one country. Even within the same credit card network information is not shared for different countries. For example, a person who has been using Visa credit cards issued by banks in China, London, or Canada for many years who moves to the U.S. and immediately applies for a visa will not be approved because of lack of credit history. An immigrant must establish a credit history from scratch in the new country, which can take years. New immigrants are forced to seek loans from irregular channels, which can create social problems.
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