What is credit scoring? Credit scoring is a system creditors use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan. Information about you and your credit experiences, like your bill-paying history, the number and type of accounts you have, whether you pay your bills by the date theyre due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. Using a statistical program, creditors compare this information to the loan repayment history of consumers with similar profiles. For example, 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 how likely it is that you will repay a loan and make the payments when theyre due.
Some insurance companies also use credit report information, along with other factors, to help predict your likelihood of filing an insurance claim and the amount of the claim. They may consider these factors when they decide whether to grant you insurance and the amount of the premium they charge. The credit scores insurance companies use sometimes are called insurance scores or credit-based insurance scores. Credit scores and credit reports
Your credit report is a key part of many credit scoring systems. Thats why it is critical to make sure your credit report is accurate. Federal law gives you the right to get a free copy of your credit reports from each of the three national consumer reporting companies once every 12 months. The Fair Credit Reporting Act (FCRA) also gives you the right to get your credit score from the national consumer reporting companies. They are allowed to charge a reasonable fee, generally around $15, for the scores. When you buy your scores, often you get information on how you can improve it. How is a credit scoring system developed?
To develop a credit scoring system or model, a creditor or insurance company selects a random sample of its customers, or a sample of similar customers, and analyzes it statistically to identify characteristics that relate to risk. Each of the characteristics then is assigned a weight based on how strong a predictor it is of who would be a good risk. Each company may use its own scoring model, different scoring models for different types of credit or insurance, or a generic model developed by a scoring company. Under the Equal Credit Opportunity Act (ECOA), a creditors scoring system may not use certain characteristics for example, race, sex, marital status, national origin, or religion as factors. The law allows creditors to use age in properly designed scoring systems. But any credit scoring system that includes age must give equal treatment to elderly applicants. credit restoration
