A credit score is a numerical expression based on a level analysis of a persons credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus. Lenders, such as banks and credit card 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. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has much overlap with data mining, which uses many similar techniques. These techniques combine thousands of factors but are similar or identical. United States[edit] Main article: Credit score (United States) In the United States, a credit score is a number based on a statistical analysis of a persons credit files, that in theory represents the creditworthiness of that person, which is the likelihood that people will pay their bills. A credit score is primarily based on credit reportinformation, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax. Income is not considered by the major credit bureaus when calculating a credit score. There are different methods of calculating credit scores. FICO score, the most widely known type of credit score, is a credit score developed by FICO, previously known as Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. All credit scores must be subject to availability. The credit bureaus all have their own credit scores: Equifaxs ScorePower ( FICO score from Equifax ), Equifax Credit Score, Experians PLUS score, and TransUnions credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models. Studies have shown scores to be predictive of risk in the underwriting of both credit and insurance.[15][16][17] Some studies even suggest that most consumers are the beneficiaries of lower credit costs and insurance premiums due to the use of credit scores.[16][18] New credit scores have been developed in the last decade by companies such as Scorelogix, PRBC, L2C, Innovis etc. which do not use bureau data to predict creditworthiness. Scorelogixs JSS Credit Score uses a different set of risk factors, such as the borrowers job stability, income, income sufficiency, and impact of economy, in predicting credit risk, and the use of such alternative credit scores is on the rise. These new types of credit scores are often combined with FICO or bureau scores to improve the accuracy of predictions. Most lenders today use some combination of bureau scores and alternative credit scores to develop better understanding of a borrowers ability to pay. It is widely recognized that FICO is a measure of past ability to pay. New credit scores that focus more on future ability to pay are being deployed to enhance credit risk models. L2C offers an alternative credit score that uses utility payment histories to determine creditworthiness, and many lenders use this score in addition to bureau scores to make lending decisions. Many lenders use Scorelogixs JSS score in addition to bureau scores, given that the JSS score incorporates job and income stability to determine whether the borrower will have the ability to repay debt in the future. It is thought that the FICO score will remain the dominant score, but it will likely be used in conjunction with other alternative credit scores that offer other pictures of risk. Usage of credit histories in employment screenings has increased from 19% in 1996 to 42% in 2006.[19]:1 However, credit reports for employment screening purposes do not include credit scores.[19]:2 Americans are entitled to one free credit report in every 12-month period from each of the three credit bureaus, but are not entitled to receive a free credit score. The three credit bureaus run Annualcreditreport, where users can get their free credit reports. Credit scores are available as an add-on feature of the report for a fee. This fee is usually $7.95, as the FTC regulates this charge, and the credit bureaus are not allowed to charge an exorbitant fee for their credit score.[citation needed] If the consumer disputes an item on a credit report obtained using the free system, under the Fair Credit Reporting Act (FCRA), the credit bureaus have 45 days to investigate, rather than 30 days for reports obtained otherwise.[20] Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their FICO score directly from FICO.[21] Credit scores (including FICO scores) are also made available free by subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores free from most such services, one must use a credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge. Until March 2009, holders of credit cards issued by Washington Mutual were offered a free FICO score each month through the banks Web site. (Chase, which took over Washington Mutual in 2008, discontinued this practice in March, 2009.)[22]Chase resumed the practice of offering a free FICO score in March, 2010 of select card members to the exclusion of the majority of former WAMU card holders. Under the Fair Credit Reporting Act, a consumer is entitled to a free credit report (but not a free credit score) within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit score. Under the Wall Street reform bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score.[23] The generic or classic FICO credit score ranges between 300 and 850. The VantageScore 3.0 score ranges from 300-850. The old VantageScore was between 501 and 990[24] The first step to interpreting a score is to identify the source of the credit score and its use. There are numerous scores based on various scoring models sold to lenders and other users. The most common was created by FICO and is called FICO score. FICO is a publicly traded corporation (under the ticker symbol FICO) that created the best-known and most widely used credit score model in the United States. FICO produces scoring models which are installed at and distributed by the three largest national credit repositories in the U.S (TransUnion, Equifax and Experian) and the two national credit repositories in Canada (TransUnion Canada and Equifax Canada). FICO controls the vast majority of the credit score market in the United States and Canada although there are several other competing players that collectively share a very small percentage of the market. In the United States, the median generic FICO score was 723 in 2006 and 711 in 2011[citation needed]. The performance definition of the FICO risk score (its stated design objective) is to predict the likelihood that a consumer will go 90 days past due or worse in the subsequent 24 months after the score has been calculated. The higher the consumers score, the less likely he or she will go 90 days past due in the subsequent 24 months after the score has been calculated. Because different lending uses (mortgage, automobile, credit card) have different parameters, FICO algorithms are adjusted according to the predictability of that use. For this reason, a person might have a higher credit score for a revolving credit card debt when compared to a mortgage credit score taken at the same point in time[citation needed]. The interpretation of a credit score will vary by lender, industry, and the economy as a whole. While 640 has been a divider between prime and subprime, all considerations about score revolve around the strength of the economy in general and investors appetites for risk in providing the funding for borrowers in particular when the score is evaluated. In 2010, the Federal Housing Administration (FHA) tightened its guidelines regarding credit scores to a small degree, but lenders who have to service and sell the securities packaged for sale into the secondary market largely raised their minimum score to 640 in the absence of strong compensating factors in the borrowers loan profile. In another housing example, Fannie Mae and Freddie Mac began charging extra for loans over 75% of the value that have scores below 740. Furthermore, private mortgage insurance companies will not even provide mortgage insurance for borrowers with scores below 660. Therefore, prime is a product of the lenders appetite for the risk profile of the borrower at the time that the borrower is asking for the loan. Several factors affect individuals credit scores. One factor is the amount an individual borrowed as compared to the amount of credit available to the individual. As an individual borrows, or leverages, more money, the individuals credit score decreases. en.wikipedia.org/wiki/Credit_score
Posted on: Thu, 01 Jan 2015 16:00:26 +0000
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