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History of Credit Scoring
Credit scoring, while not new, is rapidly gaining in popularity among credit grantors. As a result,
consumers are becoming more aware of credit scoring and its effect on their financial lives.
Credit Scores assess an individual's credit worthiness. They are calculated by comparing your curr ent credit history and current credit accounts to
statistical models. Quick, objective analysis is made and a score is issued. This score is then used as a risk indicator by credit grantors to determine whether or not to offer you credit.
Although credit scoring has been around since
the 1950's, it became widely used in the early 1980's when the three major credit bureaus – Equifax, Trans Union and TRW (now
Experian) – began working on developing generic scoring models.
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Credit Score Ranges
The calculations used to determine a score are different at each credit bureau. However, the scoring models are standardized
so that the scores at each bureau are equivalent. A score of 600 from Trans Union indicates the same risk factor to a lender as a score of 600 from Experian or Equifax.
Credit scores range from 350 to 850. Although lenders set their
own guidelines, you are likely to be a better credit risk if your credit score is high.
Generally speaking, any score higher than 660 indicates a good
credit risk. If your score falls between 620 and 660, it's usually still not bad. A score below 620 still leaves a chance for obtaining credit, but your chances are much slimmer.
Credit scores are becoming more popular with credit grantors.
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Upon what information is a credit score based?
A credit score is based on information found within your
credit report that can be categorized in five basic areas. These
are listed below in order of importance.
- Payment History – Does your credit report show
frequent late payments, judgements or bankruptcy? Are there derogatory notes such as charge-offs? Have accounts been turned over to collections?
- Outstanding Debt – How many outstanding balances
appear on your credit report? What is the average balance? What is the ratio of total balances to total credit limits on revolving debt (i.e. credit cards)?
- Credit History – How long have you had your oldest account?
- Pursuit of new credit – How many inquiries and new
accounts does your report show, and how recent are they? How long has it been since the most recent inquiry?
- Types of credit in use – How many accounts are
reported in the different credit card categories such as bank cards, travel and entertainment cards, department store cards, installment loans and so on.
When each credit score is generated, the credit bureau also
creates a list of the most significant reasons why the score was not better.
Those reasons can include:
- Account payment history is too new to rate
- Amount owed on accounts is too high
- Amount owed on revolving accounts is too high
- Amount past due on accounts
- Date of last inquiry too recent
- Delinquency on accounts
- Lack of recent bank revolving information
- Lack of recent installment loan information
- Lack of recent revolving account information
- Length of credit history is too short
- Length of revolving credit history is too short
- No recent bankcard balances.
- No recent non-mortgage balance information.
- No recent revolving balances
- Number of accounts with delinquency
- Number of bank revolving or other revolving accounts
- Number of established accounts
- Proportion of balances to credit limits is too high on revolving accounts
- Proportion of loan balances to loan amounts is too high
- Serious delinquency, derogatory public record, or collection
- Time since delinquency is too recent or unknown
- Time since derogatory public record or collection is too recent
- Time since most recent account opened is too short.
- Too few accounts currently paid as agreed
- Too few accounts with recent payment information
- Too few bank revolving accounts
- Too many accounts opened in last 12 months
- Too many accounts with balances (consumer finance accounts)
- Too many bank or national revolving accounts with balances
- Too many recent inquiries in last 12 months
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How can I improve my credit score?
Your credit score is calculated using the credit data available on the day the score is requested by a lender. Thus, your
score can vary from month to month or even day to day.
There are things you can do to develop a solid credit history
and improve your credit score.
- Pay your bills consistently and on time – recent late payments
carry more weight than past late payments.
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Check your credit report and remove any errors – If there is
inaccurate information on your credit report, it could lower your score.
- Keep your debt reasonable – as a general rule, your account
balances should be below 75% of your available credit.
- Maintain only a reasonable amount of unused credit – having
ready access to thousands of dollars of debt can actually make you an unsatisfactory credit risk.
- Avoid too many inquiries – Inquiries are interpreted as a sign
that you have been actively seeking credit and could overextend yourself or may be in financial difficulty.
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How can I find out my credit score?
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Books on Credit Scoring
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