Credit Scoring System

Credit scoring is used to help creditors evaluate your ability to repay home mortgage loans, credit cards and auto loans. Put it simply, credit scoring is a system creditors use to 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 on your credit report. Statistical program compares 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: (888) 397-3742

Trans Union: (800) 916-8800

These agencies charge around $9.00 for credit report, plus another $4 and change to provide the actual credit score.  But single agency report often doesn't have all the information. You should order a tri-merged or 3-in-1 report for $29.95. That could be the best $30 bucks you ever spend. Go here to order it.

Note: by the end 2004, The Fair and Accurate Credit Transactions Act, signed into law on Dec. 4, 2003, gives every American the right to a free credit report every year from each of the above mentioned three major credit bureaus. While it is nice, I wouldn't wait till it becomes available in your state. Time is money, remember, but it is entirely up to you.

How is a credit scoring model developed?

To develop a model, a creditor selects a reasonably large random sample of customers, and analyzes it statistically to identify factors 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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