Information about Credit Score (united States)
In the United States, a credit score is a number that is based on a statistical analysis of a person's credit report, and is used to represent the creditworthiness of that person—the likelihood that the person will pay his or her debts. A credit score is primarily based on credit report information, typically from the three major 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. Using credit scores, lenders determine who qualifies for a loan, at what interest rate, and to what credit limits. The use of credit- or identity-scoring before authorizing access to or granting credit is an implementation of a trusted system. While the most widely known score in the United States is FICO (the most widely used in the mortgage industry), there are many others, such as NextGen, VantageScore, and the CE Score.
FICO scores are intended to show the likelihood that a borrower will default on a loan; a separate score, the BNI, is used to determine the likelihood of a borrower's declaring bankruptcy.
Although the Fair Isaac Corporation's web site offers to sell borrowers their FICO Score, that company uses different scoring methods to rate a borrower's suitability for three types of credit—mortgages, automobile loans, and consumer credit— reflecting the loan default risks inherent to these different types of money lending. It is not unusual for these scores to differ—by 50 points or more—for the same borrower (the score offered to borrowers is their consumer credit score).
In the U.S., three credit reporting agencies (incorrectly called credit bureaus), Equifax, Experian, and TransUnion, calculate a borrower's credit score using their own different computation formulae. The scores they generate (with trademarked names), differ in what they mean to predict, the statistical methods used to determine a credit-worthiness score, and what data are used and how they are weighted. For example: Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax; Empirica, Empirica Auto 95, Precision Score, and Precision 03 from TransUnion; and the Fair Isaac Risk Score is available from Experian. Although the Fair Isaac Corporation develops these credit score versions for the different agencies, they are different numbers, and are periodically updated to reflect current consumer loan repayment rates.
The statistical models for generating credit scores are subject to federal regulation. The Federal Reserve Board's Regulation B (implementing the Equal Credit Opportunity Act), expressly prohibits a credit-scoring model considering "prohibited bases" such as race, skin color, religion, national origin, sex, and marital status. It also states that credit-scoring models must be empirical and statistically sound. Furthermore, if negative action results from a credit score (i.e. a denied application for credit), the lender must state to the borrower the specific reasons for the denial. A statement that the person "failed to score high enough" is insufficient; the reasons must be specific (e.g. "too many delinquencies of 60 days or greater").
There are several, generally-accepted algorithms for extrapolating the primary factors generating a low credit score. Typically, one or more of these algorithms is used to list reasons for when a loan applicant is denied credit, in satisfaction of the Regulation B requirement that specific reasons be given to the applicant.
For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.
The Fair Isaac Corp. offers scoring models for the U.S., Canada, and South Africa, and offers a Global FICO score for other countries.
Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each:
Current income and employment history do not influence the FICO score, but they are weighed when applying for credit. For instance, an unemployed individual with no other sources of income will not usually be approved for a home mortgage, regardless of his or her FICO score.
There are other special factors which can weigh on the FICO score.
Each individual actually has three credit scores for any given scoring model because the three credit agencies have their own, independent databases. As these databases are independent of each other, they may contain entirely different data. Many lenders will check an applicant's score from each bureau and use the median score to determine the applicant's credit worthiness.
VantageScore ranges from 501 to 990 and offers letter grades as well: A (901-990), B (801-900), C (701-800), D (601-700), and F (501-600).
Equifax and Fair Isaac teamed up to provide consumers with their FICO credit scores. The other two credit bureaus, TransUnion and Experian, also sell their scores to consumers. Experian calls its credit score product PLUS Score. The PLUS Score ranges from 330 to 830.
Credit scores are often used in determining prices for auto and homeowner insurance. Recently, some of the agencies that generate credit scores have also been generating more specialized insurance scores, which insurance companies then use to rate the quality of potential customers. These scores are unavailable to consumers.
Many employers require job applicants to give permission for them to run a credit check as part of the application process. This credit information can be used as a signal of a person's level of responsibility. Note that job applicants have certain rights under the Fair Credit Reporting Act and are not required to consent to credit check.
A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction.
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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. Using credit scores, lenders determine who qualifies for a loan, at what interest rate, and to what credit limits. The use of credit- or identity-scoring before authorizing access to or granting credit is an implementation of a trusted system. While the most widely known score in the United States is FICO (the most widely used in the mortgage industry), there are many others, such as NextGen, VantageScore, and the CE Score.
FICO score and others
FICO is the acronym for Fair Isaac Corporation, a publicly-traded corporation (under the symbol "FIC") that created the best-known and most widely used credit score model in the United States. The FICO Score is calculated statistically, with information from a consumer's credit files. The FICO score is primarily used in credit decisions made by banks and other providers of secured and unsecured credit. Banks and other institutions using such scores as a factor in their lending decisions may deny credit, charge higher interest rates, demand more collateral, or require extensive income and asset verification if the applicant's FICO credit score is low.FICO scores are intended to show the likelihood that a borrower will default on a loan; a separate score, the BNI, is used to determine the likelihood of a borrower's declaring bankruptcy.
Although the Fair Isaac Corporation's web site offers to sell borrowers their FICO Score, that company uses different scoring methods to rate a borrower's suitability for three types of credit—mortgages, automobile loans, and consumer credit— reflecting the loan default risks inherent to these different types of money lending. It is not unusual for these scores to differ—by 50 points or more—for the same borrower (the score offered to borrowers is their consumer credit score).
In the U.S., three credit reporting agencies (incorrectly called credit bureaus), Equifax, Experian, and TransUnion, calculate a borrower's credit score using their own different computation formulae. The scores they generate (with trademarked names), differ in what they mean to predict, the statistical methods used to determine a credit-worthiness score, and what data are used and how they are weighted. For example: Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax; Empirica, Empirica Auto 95, Precision Score, and Precision 03 from TransUnion; and the Fair Isaac Risk Score is available from Experian. Although the Fair Isaac Corporation develops these credit score versions for the different agencies, they are different numbers, and are periodically updated to reflect current consumer loan repayment rates.
NextGen score
The NextGen Score is a scoring model designed for consumers; other credit consumer scores are published by MyFICO.com and by Community Empower, as the CE Score.VantageScore
In 2006, in attempting to make scoring consistent, the three major credit-reporting agencies introduced VantageScore. VantageScore uses a number range (501 to 990), which is different from FICO's, and assigns letter grades (A to F) to specific score ranges. A borrower's VantageScore may differ from agency to agency, but discrepancies stem from data differences in the reported credit information, not because of differences among credit-scoring mathematical models. Since FICO remains as the widely-used score by money lenders, the agencies continue offering FICO scores (or the closest equivalents).Score facts
Most scores use a multiple-scorecard design. Each version may use individual scorecards. Typically, a given borrower is compared with other consumers, (e.g. a borrower with two 30-day late payments will be scored against a similar delinquent-payer population). The borrower then is graded according to the repayment risk-determining mathematical variables in order to place him-her within that group of like borrowers. Most large banks build and use their own proprietary statistical credit-scoring models, often in conjunction with outside scoring formulae.The statistical models for generating credit scores are subject to federal regulation. The Federal Reserve Board's Regulation B (implementing the Equal Credit Opportunity Act), expressly prohibits a credit-scoring model considering "prohibited bases" such as race, skin color, religion, national origin, sex, and marital status. It also states that credit-scoring models must be empirical and statistically sound. Furthermore, if negative action results from a credit score (i.e. a denied application for credit), the lender must state to the borrower the specific reasons for the denial. A statement that the person "failed to score high enough" is insufficient; the reasons must be specific (e.g. "too many delinquencies of 60 days or greater").
There are several, generally-accepted algorithms for extrapolating the primary factors generating a low credit score. Typically, one or more of these algorithms is used to list reasons for when a loan applicant is denied credit, in satisfaction of the Regulation B requirement that specific reasons be given to the applicant.
For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.
The Fair Isaac Corp. offers scoring models for the U.S., Canada, and South Africa, and offers a Global FICO score for other countries.
Makeup of the credit score
)
The approximate makeup of the FICO score Fair Isaac discloses to consumers
Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each:
- 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
- 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
- 15% — length of credit history
- 10% — types of credit used (installment, revolving, consumer finance)
- 10% — recent search for credit and/or amount of credit obtained recently
Current income and employment history do not influence the FICO score, but they are weighed when applying for credit. For instance, an unemployed individual with no other sources of income will not usually be approved for a home mortgage, regardless of his or her FICO score.
There are other special factors which can weigh on the FICO score.
- Any monies owed because of a court judgment, tax lien, or similar carry an additional negative penalty, especially when recent.
- Having more than a certain number of consumer finance credit accounts also carries a negative weight (critics say that this causes a vicious cycle, locking people into continuing to use consumer finance companies).
- The number of recent credit checks also can weigh down the score, although credit agencies usually claim to allow for credit checks made within a certain window of time not to aggregate, so as to allow the consumer to shop around for rates.
Range of scores
A FICO score is between 300 and 850, exhibiting a left-skewed distribution with 60% of scores between 650 and 799.[2] According to Fair Isaac the median score is 723 (half of scores above and below)[3] whereas according to Experian (using the Fair Isaac risk model) the average credit score is 678 (lowest scores are farther from the median than the highest scores).[4] The performance of the scores is monitored and the scores are periodically aligned so that a credit grantor normally does not need to be concerned about which score card was employed.Each individual actually has three credit scores for any given scoring model because the three credit agencies have their own, independent databases. As these databases are independent of each other, they may contain entirely different data. Many lenders will check an applicant's score from each bureau and use the median score to determine the applicant's credit worthiness.
VantageScore ranges from 501 to 990 and offers letter grades as well: A (901-990), B (801-900), C (701-800), D (601-700), and F (501-600).
Free annual credit reports
As a result of the FACT Act (Fair and Accurate Credit Transactions Act), each legal U.S. resident is entitled to one free copy of his or her credit report from each credit reporting agency once every twelve months. This information is available at the only government-sanctioned credit reporting agency-operated website, annualcreditreport.com, by calling 1-877-322-8228, or by mailing the Annual Credit Report Request Form. To guard against inaccurate information or fraud more often than yearly, one can request a report from a different credit reporting agency each four months. However, the free report does not contain a credit score, though a credit score may be purchased at the time of access. Requesting a credit report will subject you to "pre-screened" offers of credit cards. To prevent all three credit bureaus from making your address available to credit card companies for this purpose, you may opt out by calling 1-888-5-OPT-OUT (1-888-567-8688).Equifax and Fair Isaac teamed up to provide consumers with their FICO credit scores. The other two credit bureaus, TransUnion and Experian, also sell their scores to consumers. Experian calls its credit score product PLUS Score. The PLUS Score ranges from 330 to 830.
Non-traditional uses of credit scores
In September 2004, TXU (a Texas utility company) announced it would begin setting individualized electricity prices based on credit score. However, due to negative press and pressure from the Texas Public Utility Commission, the plan was not implemented.[1]Credit scores are often used in determining prices for auto and homeowner insurance. Recently, some of the agencies that generate credit scores have also been generating more specialized insurance scores, which insurance companies then use to rate the quality of potential customers. These scores are unavailable to consumers.
Many employers require job applicants to give permission for them to run a credit check as part of the application process. This credit information can be used as a signal of a person's level of responsibility. Note that job applicants have certain rights under the Fair Credit Reporting Act and are not required to consent to credit check.
References
1. ^ [2]
2. ^ About Credit Scores
3. ^ What is the average credit score?
4. ^ National Average Credit Score
2. ^ About Credit Scores
3. ^ What is the average credit score?
4. ^ National Average Credit Score
See also
- Fair Credit Reporting Act (FCRA)
- Credit reference
- Credit score, international article
- Credit Scorecards
- Adverse Credit History
- Credit rating agency
- Identity theft
- Seasoned trade lines, sometimes used to artificially increase FICO scores
- FICA, a similar-sounding acronym in the world of personal finance that people sometimes confuse with FICO
External links
- US Government FAQ about FACT
- Text of Regulation B, which stipulates the conditions that US credit scoring models must satisfy
- PBS FRONTLINE "Credit Scores: What You Should Know About Your Own," by Malgorzata Wozniacka and Snigdha Sen (November 2004)
- Fair Isaac Corporation
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both).
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Faced by lenders to consumers
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Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy.
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A credit bureau (U.S.), or credit reference agency (UK) is a company that provides credit information on individual borrowers. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate applied to loans.
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bank is a commercial or state institution that provides financial services , including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.
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A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction.
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In accounting and finance, bad debt is the portion of receivables that can no longer be collected, typically from accounts receivable or loans. Bad debt in accounting is considered an expense.
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This article or section needs copy editing for grammar, style, cohesion, tone and/or spelling.
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In the security engineering subspecialty of computer science, a trusted system is a system that is relied upon to a specified extent to enforce a specified security policy. As such, a trusted system is one which failure may break a specified security policy.
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Fair Isaac Corporation
Public company (NYSE: FIC )
Founded 1956
Headquarters Minneapolis, Minnesota
Key people Dr. Mark N. Greene CEO
Products FICO score, Blaze Advisor, Triad, Capstone, Falcon, SmartAdvisor
Employees 3,000 (2006)
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Public company (NYSE: FIC )
Founded 1956
Headquarters Minneapolis, Minnesota
Key people Dr. Mark N. Greene CEO
Products FICO score, Blaze Advisor, Triad, Capstone, Falcon, SmartAdvisor
Employees 3,000 (2006)
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VantageScore is the name of a new credit rating product that is now being offered by the three major credit bureaus (Equifax, Experian and TransUnion). The new product was announced by the three bureaus on March 14, 2006.
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Fair Isaac Corporation
Public company (NYSE: FIC )
Founded 1956
Headquarters Minneapolis, Minnesota
Key people Dr. Mark N. Greene CEO
Products FICO score, Blaze Advisor, Triad, Capstone, Falcon, SmartAdvisor
Employees 3,000 (2006)
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Public company (NYSE: FIC )
Founded 1956
Headquarters Minneapolis, Minnesota
Key people Dr. Mark N. Greene CEO
Products FICO score, Blaze Advisor, Triad, Capstone, Falcon, SmartAdvisor
Employees 3,000 (2006)
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Motto
"In God We Trust" (since 1956)
"E Pluribus Unum" ("From Many, One"; Latin, traditional)
Anthem
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"In God We Trust" (since 1956)
"E Pluribus Unum" ("From Many, One"; Latin, traditional)
Anthem
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This article or section needs copy editing for grammar, style, cohesion, tone and/or spelling.
You can assist by [ editing it] now. A how-to guide is available, as is general .
This article has been tagged since February 2007.
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You can assist by [ editing it] now. A how-to guide is available, as is general .
This article has been tagged since February 2007.
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Collateral may refer to:
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- Collateral (finance) in finance means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay. Also can be an exchange for voting rights.
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Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business.
Internationally, the accounting term income is synonymous to term revenue minus expenses.
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Internationally, the accounting term income is synonymous to term revenue minus expenses.
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asset is meant probable future economic benefits controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained.
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In finance, default occurs when a debtor has not met its legal obligations according to the debt contract, e.g. it has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract.
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Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed.
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A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations. In most cases, these issuers are companies, cities, non-profit organizations, or national governments issuing debt-like securities that can be traded on a
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Equifax Inc.
Corporation (NYSE: EFX )
Founded 1899
Headquarters Atlanta, Georgia
Industry Business Services, Consumer Services
Revenue $1.5 Billion USD (2005)
Employees 5,000
Website www.equifax.com
Equifax, Inc.
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Corporation (NYSE: EFX )
Founded 1899
Headquarters Atlanta, Georgia
Industry Business Services, Consumer Services
Revenue $1.5 Billion USD (2005)
Employees 5,000
Website www.equifax.com
Equifax, Inc.
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Experian Plc.
Public (LSE: EXPN )
Founded 1980 as Information Services Company
Headquarters Dublin, Ireland
Key people John Peace, Chairman
Don Robert, CEO
Paul Brooks, CFO
Industry Business Services
Revenue $3.
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Public (LSE: EXPN )
Founded 1980 as Information Services Company
Headquarters Dublin, Ireland
Key people John Peace, Chairman
Don Robert, CEO
Paul Brooks, CFO
Industry Business Services
Revenue $3.
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TransUnion (full name Trans Union LLC) is a consumer credit reporting agency, considered one of the "big three" agencies in the United States. Like its main competitors, Experian and Equifax, it now markets its credit reports directly to consumers, in addition to its core
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VantageScore is the name of a new credit rating product that is now being offered by the three major credit bureaus (Equifax, Experian and TransUnion). The new product was announced by the three bureaus on March 14, 2006.
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Federal Reserve System
Seal The Federal Reserve System Eccles Building (Headquarters)
Headquarters Washington, D.C.
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Seal The Federal Reserve System Eccles Building (Headquarters)
Headquarters Washington, D.C.
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The Equal Credit Opportunity Act (ECOA) is a United States law that states that creditors must evaluate candidates based on credit worthiness only, not on factors that have nothing to do with their ability to repay the debt.
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RACE can refer to:
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- Research and Development in Advanced Communications Technologies in Europe, a program launched in 1988 by the Commission of the European Communities
- Rapid Amplification of cDNA Ends, a molecular biology technique
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religion is a set of common beliefs and practices generally held by a group of people, often codified as prayer, ritual, and religious law. Religion also encompasses ancestral or cultural traditions, writings, history, and mythology, as well as personal faith and mystic experience.
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Sex refers to the male and female duality of biology and reproduction. Unlike organisms that only have the ability to reproduce asexually, sexed male and female pairs have the ability to produce offspring through meiosis and fertilization.
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A person's marital status describes their relationship with a significant other. Some common statuses are:
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- married
- single
- separated
- divorced
- widowed
- engaged
- annulled
- cohabitating
- deceased
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In mathematics, computing, linguistics, and related disciplines, an algorithm is a finite list of well-defined instructions for accomplishing some task that, given an initial state, will proceed through a well-defined series of successive states, eventually terminating in an
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Herod_Archelaus
