Credit Score

Credit scoring system is the mechanism, which, in fact, is responsible for the decision of creditors as whether to grant or not to grant credit to the customer. It considers credit report of the customer and studies his credit experiences: his bill-paying history, the number and type of accounts he has, late payments, collection actions, outstanding debt, and the age of his accounts. Scoring models may as well consider the information not referring to your credit report. For example, your job or occupation, length of employment, or whether you own a home.

Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. As a result, they get the picture of the customer’s creditworthiness, which helps them make the right decision.

Credit report is an important part of many credit scoring systems, that’s why it is necessary to make sure it’s accurate before submitting a credit application for getting a loan. Every American citizen has a right to get a free credit report from consumer reporting companies, at request, once every 12 months. It is guaranteed by Fair Credit Reporting Act (FCRA).

There are certainly other methods of judging the paying ability of the customer, but why is credit scoring considered to be the best and most reliable?

Credit scoring is based on objective data and statistics, whereas judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals. Besides, you can always ask your credit company to show their statement on your inquiry you and to explain why your credit has been denied, if so.

How is credit scoring model developed?

Credit scoring model is developed on the basis of a sample of customers and statistic data essential for identifying their characteristics relating to creditworthiness. Put together, all the data make a weight for customer’s paying ability picture and serve a determiner for the creditor of whether the client would be a risk. Note that a credit company might either have its own credit scoring model or use a generic model developed by a credit scoring company.

Sometimes it is necessary to improve your score before applying for credit. How can it be done?

First of all, all the factors considered by the model are interconnected so that the change in one factor may entail the changes in another or in all of them. It is to the creditor who you can turn to for the advise of what might improve your score under the particular model used to evaluate your credit application.

In brief, what you need to do is to 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.

What factors do scoring models generally evaluate in your credit report?

If you applied for new accounts recently. If you have applied for too many new accounts recently, that may have a negative effect on your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account are not counted
The number and what types of your credit accounts. Too many credit card accounts may have a negative effect on your score. As for the type, some of them, for example, loans from finance companies may negatively affect your credit score
Having outstanding debt. If you owe for your credit the amount, which is close to your credit limit, that is likely to have a negative effect on your score
Timely paying off your bills, which is reflected in your history. Thus, if you have paid bills late, had an account referred to collections, or declared bankruptcy It is likely that your score will be affected negatively
The length of your credit track record. The length of the customer’s credit history is also sufficient for developing the models. If it is too short, it may affect your score. But this factor is not as essential as your timely payments and low balances

Is the credit scoring system reliable?

Because the system of scoring credits is arbitrary and impersonal, it can evaluate applicants consistently and impartially, which helps make more accurate decisions as on granting credits. Besides, if customer’s scores are not high enough to pass easily or are low enough to fail absolutely, credit company may send them to a credit manager for accounting whether the company or lender will extend credit.

What to do if you are denied credit or don’t get the terms you want?

There is a special organization, Equal Credit Opportunity Act (ECOA) that is responsible for making sure that, in case you are denied credit, the creditor officially names the reasons for it in a specific notice within 60 days. More over, the ECOA defines the reasons the credit companies mention as consistent or not. Thus, according the ECOA system, constituent reasons are: low income or not long enough employment; inconsistent reasons are: not enough points on our credit scoring system or not meeting minimum standards of the company.

Anyway, whatever the reason might be, you can always reapply after eliminating the obstacle, say, paying down your balances or closing some accounts. Note that yon have the right to know all the details of processing you inquiry, including the name, address and phone number of the consumer reporting company that supplied the information.

If you didn’t get the rate or credit terms you want, you should ask the creditor what credit scoring system was used. They also have to provide you with the information on how you can improve your application and explain you why they offered you this or that program, including loan terms, rate, etc.

General Tips

Professional dealing with credits every day have come up with the following tips for first-time or not experienced enough credit takers:

Turn only to a reliable company
Don’t share easily your personal credit information
Make sure the company process your application and doesn’t put it off "for a better time"
Consider all the risks in advance
Read the small print! Strangely enough, but very often it is used for most important and tricky information
Be aware of report fraud!