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Like It Or Not, You Have A Score To Settle! Part 1
Just when most people finish with school and can stop worrying
about test scores, there's a new kind of scoring that enters the
picture. It's called credit scoring. And, its impact on your
financial future can mean more to you than a college degree.
Why It's So Important:
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, scoring has been used to help
creditors evaluate your ability to repay home mortgage loans.
Precisely 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 bill-paying history, the number and type of
accounts you have, late payments, collection actions, outstanding
debt, and age of your accounts is collected from credit
applications and your credit report.
Using a statistical program, creditors compare this
information to the credit performance of consumers with similar
profiles. A scoring system awards points for each factor that
helps predict who is most likely to repay a debt. Total number of
points helps predict how creditworthy you are; how likely it is
that you will repay a loan and make payments when due.
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 applications objectively. Judgmental methods
typically rely on criteria that are not systematically tested and
can vary when applied by different individuals.
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 scoring model, different scoring
models for different types of credit, or a generic model
developed by a credit scoring company.
How reliable is the credit scoring system?
Credit scoring systems enable creditors to evaluate millions
of applicants consistently and impartially on many different
characteristics. But to be statistically valid, scoring systems
must be based on a big enough sample. Remember that these systems
generally very from creditor to creditor.
Although you may think such a system is arbitrary or
impersonal, it can help make decisions faster, more accurately,
and more impartially than individuals when it is properly
designed.
In fact, many creditors design their systems so that, in
marginal cases, applicants whose scores are not high enough to
pass easily, or are low enough to fail absolutely are referred to
a credit manager who decides whether the company or lender will
extend credit. This may allow for discussion and negotiation
between the credit manager and the consumer.
What happens if you are denied credit or don't get the terms
you want?
For the answer to that crucial question and how to improve
your credit score, be sure to read Part II of "Like It Or Not,
You Have A Score To Settle." at Credit And You.com
Copyright © Credit and You | All Rights Reserved
Credit and You.com are a group of credit expert, who have
created a free credit information website for consumers. Feel
free to pass this article along to family and friends. http://www.creditandyou.com/creditscoreexplained.html
MORE RESOURCES:
EnerJex completes $50M credit facilityBizjournals.com, NC - 15 hours agoIn a release Tuesday, Overland Park-based EnerJex (OTCBB: EJXR) said it will use proceeds from the facility to redeem $6.3 million of outstanding 10 percent ... |
Credit - Google News
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