A credit score is a numerical expression based on a statistical analysis of a person's 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. 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, employers, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.
Australia
In Australia, credit scoring is widely accepted as the primary way applicant creditability is assessed. Credit scoring is not only used to determine whether credit should be approved to an applicant, but credit scoring is also used in the setting of credit limits on credit cards/store cards, in behavioral modeling such as collections scoring, and also in the pre-approval of additional credit to a company's existing client base.
Although logistic (or non-linear) probability modeling is still the most popular means by which to develop scorecards, various other methods offer extremely powerful alternatives, including MARS, C&RT, CHAID, and random forests.
Canada
The system of credit reports and scores in Canada is very similar to that in the United States, with two of the same reporting agencies active in the country: Equifax and TransUnion (Experian, which had entered the Canadian market with the purchase of Northern Credit Bureaus in 2008, announced the closing of its Canadian operations in 2009).
There are, however, some key differences. One such difference is that, unlike the United States, where a consumer is allowed only one free copy of their credit report a year, in Canada, the consumer may order a free copy of their credit report any number of times in a year, as long as the request is made in writing, and as long as the consumer asks for a printed copy to be delivered by mail.[1][2] This request by the consumer is noted in the credit report, but it has no effect on their credit score. According to Equifax's ScorePower Report, FICO scores range between 300 and 900.
The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score.[3] This publication provides sample credit report and credit 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. The publication is available online at the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.
Sweden
Sweden also has a system for credit score. This system aims to find people with bad payment attitude. It has only two levels, good and bad. Anyone who does not pay a requested debt payment on time, and also not after a reminder, will have their case forwarded to the Swedish Enforcement Administration (Swedish: Kronofogdemyndigheten), a national authority which collects debts. The very appearance of a person or a company as a debtor in this authority, will render a mark among private credit bureaus. This mark is called Betalningsanmärkning (payment remark) and can according to the law be stored for three years. Such a mark will make it very difficult to get a loan, a rental apartment, a telephone subscription or a job with cash handling. The banks of course use income and asset figures in connection with loan assessments.
If one gets a request by the Enforcement Administration to pay, it is possible to object to it. Then the one requesting the payment must show the correctness in the court. Failure to object is seen as admitting the debt. If the debtor loses the court trial, the court costs are added to the debt, and the Enforcement Administration fee also. Taxes and authority fees must always be paid on request unless payment has already been made.
The Swedish astronaut Christer Fuglesang has a Betalningsanmärkning since he forgot to pay the Stockholm congestion tax, and had an old invalid address registered, since he lives in the USA. Letters with payment requests did not reach him on time. Every person with a Swedish national identification number must register a valid address, even if living abroad, since sent letters are considered to have arrived.
United Kingdom
The most popular statistical technique used is logistic regression to predict a binary outcome, such as bad debt or no bad debt. Some banks also build regression models that predict the amount of bad debt a customer may incur. Typically, this is much harder to predict, and most banks focus only on the binary outcome.
Credit scoring is closely regulated by the Financial Services Authority.
It is very difficult for a consumer to know in advance if they have a high enough credit score to be accepted for credit with a particular lender. This is due to the complexity and structure of credit scoring, which differs from one lender to another.
Also, lenders do not have to reveal their credit scoring methods, nor do they have to reveal the minimum credit score required for the applicant to be accepted. Simply due to this lack of information to the consumer, it is impossible for him or her to know in advance if they will pass a lender's credit scoring requirements.
If the applicant is declined for credit, the lender is also not obliged to reveal the exact reason why.
United States
In the United States, a credit score is a number based on a statistical analysis of a person's credit files, that in theory represents the creditworthiness of that person, which is the likelihood that the person will pay their bills. A credit score is primarily based on credit report information, 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, the most widely known type of credit score, is a credit score developed by 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. The credit bureaus all have their own credit scores: Equifax's ScorePower, Experian's PLUS score, and TransUnion's 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 both the underwriting of credit and insurance.[4][5][6] Some studies even suggest that most consumers are the beneficiaries of scores in the form of lower credit costs and insurance premiums.[7][5]
Americans are entitled to one free credit report within a 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.com, where users can get their free credit reports. Credit scores are available as an add-on feature of the report for a fee. Obtaining a free credit report or buying a credit score from annualcreditreport.com has some disadvantages relative to alternative ways to obtain your report or score. If the consumer disputes an item on a credit report pulled using the free system, the credit bureaus, under the Fair Credit Reporting Act (FCRA) now have 45 days to investigate, rather than 30.[8]
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 Fair Isaac.[9] Credit scores (including FICO scores) are also made available for "free" through 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 for free from most such services, one must use their credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge.[10] Until March 2009, holders of credit cards issued by Washington Mutual have offered a free FICO score each month through the bank's Web site. (Chase, which took over Washington Mutual in 2008, discontinued this practice in March, 2009.)[11]
Under the FCRA, 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 rating.
The FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.[12]
Other countries
References
See also
External links
