What is creit scoring
Ever wonder how a creitor decides whether to grant you creit? For years, creitors have been using creit scoring systems to determine if you'd be a good risk for creit cards and auto loans. More recently, creit scoring has been used to help creitors evaluate your ability to repay home mortgage loans. Here's how creit scoring works in helping decide who gets creit -- and why.
What is creit scoring?
creit scoring is a system creitors use to help determine whether to give you creit.
Information about you and your creit 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 from your creit application and your creit report. Using a statistical program, creitors compare this information to the creit performance of consumers with similar profiles. A creit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a creit score -- helps predict how creitworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
Because your creit report is an important part of many creit scoring systems, it is very important to make sure it's accurate before you submit a creit application. To get copies of your report, contact the three major creit reporting agencies:
* Equifax: (800) 685-1111 www.equifax.com
* Experian (formerly TRW): (888) EXPERIAN (397-3742) www.experian.com
* Trans Union: (800) 916-8800 www.tuc.com
These agencies may charge you up to $9.00 for your creit report. For a limited time, you can get a free copy of your creit report from ConsumerInfo.
Why is creit scoring used?
creit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
How is a creit scoring model developed?
To develop a model, a creitor 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 creitworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good creit risk. Each creitor may use its own creit scoring model, different scoring models for different types of creit, or a generic model developed by a creit scoring company.
Under the Equal creit Opportunity Act, a creit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creitors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
How reliable is the creit scoring system?
creit scoring systems enable creitors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, creit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creitor to creitor.
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. And many creitors 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 creit manager who decides whether the company or lender will extend creit. This may allow for discussion and negotiation between the creit manager and the consumer.
What happens if you are denied creit or don't get the terms you want?
If you are denied creit, the Equal creit Opportunity Act requires that the creitor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creitor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our creit scoring system."
If a creitor says you were denied creit because you are too near your creit limits on your charge cards or you have too many creit card accounts, you may want to reapply after paying down your balances or closing some accounts. creit scoring systems consider updated information and change over time.
Sometimes you can be denied creit because of information from a creit report. If so, the Fair creit Reporting Act requires the creitor to give you the name, address and phone number of the creit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for creit. The creit reporting agency can tell you what's in your report, but only the creitor can tell you why your application was denied.
If you've been denied creit, or didn't get the rate or creit terms you want, ask the creitor if a creit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get creit, ask the creitor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your creit report, be sure to dispute the inaccurate information in your creit report.
Where can you get more information?
The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the online complaint form. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
