wonder how a creditor decides whether to grant you credit? For
years, creditors have been using credit scoring systems to determine
if you'd be a good risk for credit cards and auto loans. More
recently, credit scoring has been used to help creditors evaluate
your ability to repay home mortgage loans. Here's how credit
scoring works in helping decide who gets credit -- and why.
is credit scoring?
Credit scoring is a system creditors use to help determine whether
to give you credit.
about you and your credit 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 credit application and your credit report.
Using a statistical program, creditors compare this information
to the credit performance of consumers with similar profiles.
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, that is, how likely it is that you will repay a loan and
make the payments when due.
your credit report is an important part of many credit scoring
systems, it is very important to make sure it's accurate before
you submit a credit application. To get copies of your report,
contact the three major credit reporting agencies:
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
is credit scoring used?
Credit 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.
is a credit scoring model developed?
To develop a model, a creditor 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 creditworthiness. Then, each
of these factors is assigned a weight based on how strong a
predictor it is of who would be a good credit risk. Each creditor
may use its own credit scoring model, different scoring models
for different types of credit, or a generic model developed
by a credit scoring company.
the Equal Credit Opportunity Act, a credit scoring system may
not use certain characteristics like -- race, sex, marital status,
national origin, or religion -- as factors. However, creditors
are allowed to use age in properly designed scoring systems.
But any scoring system that includes age must give equal treatment
to elderly applicants.
can I do to improve my score?
Credit scoring models are complex and often vary among creditors
and for different types of credit. If one factor changes, your
score may change -- but improvement generally depends on how
that factor relates to other factors considered by the model.
Only the creditor can explain what might improve your score
under the particular model used to evaluate your credit application.
scoring models generally evaluate the following types of information
in your credit report:
you paid your bills on time? Payment history typically is a
significant factor. It is likely that your score will be affected
negatively if you have paid bills late, had an account referred
to collections, or declared bankruptcy, if that history is reflected
on your credit report.
What is your outstanding debt? Many scoring models evaluate
the amount of debt you have compared to your credit limits.
If the amount you owe is close to your credit limit, that is
likely to have a negative effect on your score.
How long is your credit history? Generally, models consider
the length of your credit track record. An insufficient credit
history may have an effect on your score, but that can be offset
by other factors, such as timely payments and low balances.
Have you applied for new credit recently? Many scoring models
consider whether you have applied for credit recently by looking
at "inquiries" on your credit report when you apply
for credit. If you have applied for too many new accounts recently,
that may negatively affect your score. However, not all inquiries
are counted. Inquiries by creditors who are monitoring your
account or looking at credit reports to make "prescreened"
credit offers are not counted.
How many and what types of credit accounts do you have? Although
it is generally good to have established credit accounts, too
many credit card accounts may have a negative effect on your
score. In addition, many models consider the type of credit
accounts you have. For example, under some scoring models, loans
from finance companies may negatively affect your credit score.
Scoring models may be based on more than just information in
your credit report. For example, the model may consider information
from your credit application as well: your job or occupation,
length of employment, or whether you own a home.
improve your credit score under most models, concentrate on
paying your bills on time, paying down outstanding balances,
and not taking on new debt. It's likely to take some time to
improve your score significantly.
reliable is the credit scoring system?
Credit scoring systems enable creditors to evaluate millions
of applicants consistently and impartially on many different
characteristics. But to be statistically valid, credit scoring
systems must be based on a big enough sample. Remember that
these systems generally vary from creditor to creditor.
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 creditors
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 credit manager who decides
whether the company or lender will extend credit. This may allow
for discussion and negotiation between the credit manager and
happens if you are denied credit or don't get the terms you
If you are denied credit, the Equal Credit Opportunity Act requires
that the creditor 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 creditor
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 credit scoring system."
a creditor says you were denied credit because you are too near
your credit limits on your charge cards or you have too many
credit card accounts, you may want to reapply after paying down
your balances or closing some accounts. Credit scoring systems
consider updated information and change over time.
you can be denied credit because of information from a credit
report. If so, the Fair Credit Reporting Act requires the creditor
to give you the name, address and phone number of the credit
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 credit. The credit reporting agency can tell you what's
in your report, but only the creditor can tell you why your
application was denied.
you've been denied credit, or didn't get the rate or credit
terms you want, ask the creditor if a credit 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 credit, ask the creditor 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 credit report, be sure to dispute the inaccurate information
in your credit report.
can you get more information?
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 or to get free information on consumer issues,
visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357);
TTY: 1-866-653-4261. 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