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What is Credit Scoring?

Credit scoring is a statistical process by which scores are calculated in order to predict repayment. The credit bureaus (TRW, CBI, TU) have created models make it possible to assign points to form a credit “snap shot.” This snapshot (or score) sums up an applicant’s past payment history and current usage of credit. By creating an overall score, no single factor (bankruptcy or late payment) will be the sole source of a score.

What Odds Are Indicated By The Scores?

The score that results from the computerized model will range from 300-900. Ranges have been shown to predict satisfactory repayment for a mortgage.

Odds
 		 Good to Bad Payer
Below 600 8 to 1
620-659 26 to 1
660-679 38 to 1
680-699 55 to 1
700-719 123 to 1
720-759 323 to 1
760-799 597 to 1

Table 1.  Scores and predictive re-payment

What Data Does a Bureau Credit Scoring Model Use?

Scoring models analyze all credit information stored in a bureau’s credit file for the applicant at the time of request. Any mistakes or duplication will be factored into the score until corrected.

The score is only as accurate as the information on file!

Any mistakes or duplication will be factored into the score until corrected.

Factors Used:
  • Past Payment Performance (35%)
    Recent late payments will carry more weight than a bankruptcy five years ago with clean credit since.
     
  • Credit Utilization (30%)
    Low balances on several credit cards is better than high balances on a few cards. Balances close to the maximum limit indicate a likelihood of more credit applications in the future. (Note: do not close accounts without a full analysis!)
     
  • Credit History (15%)
    How long has an applicant used credit? Opening new accounts and closing seasoned accounts will negatively impact a score. Brief histories can still return very high scores that can be used for approval.
     
  • Types of Credit in Use (10%)
    Finance companies with lines of credit will score lower than bank lines and department store lines. Deferred payment programs will score lower.
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    • Inquiries-New Credit Applications (10%)
      Looking for new credit can mean higher risk. This is especially true if other accounts are “maxed out.” Multiple inquiries for a mortgage or auto within a fourteen day period of time are only counted as one inquiry (source: Nat’l Assoc. of Mortgage Brokers).