The credit value in the United States is a number representing a person's creditworthiness, the likelihood that the person will pay the debt.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risks posed by borrowing money to consumers. Lenders allege that the widespread use of credit scores has made credit more available and cheaper for many consumers.
Video Credit score in the United States
Credit scoring model
FICO Score
The FICO score was first introduced in 1989 by FICO, then called Fair, Isaac, and Company. The FICO model is used by most banks and lenders, and is based on consumer credit files from three national credit bureaus: Experian, Equifax, and TransUnion. Because consumer credit files can contain different information in each agency, FICO scores may vary depending on which agency gives information to FICO to generate a score.
Makeup
Credit scores are designed to measure default risk by considering various factors in a person's financial history. Although the exact formula for calculating credit scores is confidential, FICO has revealed the following components:
- 35%: payment history: This is best described as the presence or lack of degrading information. Bankruptcy, liens, judgment, settlement, off charges, repossessions, foreclosures, and late payments can cause FICO scores to decline.
- 30%: debt burden: This category considers a number of specific debt measurements. According to FICO, there are six different metrics in the debt category including debt-to-limit ratio, number of accounts with balances, amount payable in different types of accounts, and amounts paid on installment loans.
- 15%: length of credit history aka Time in File: As the age of credit history can have a positive impact on its FICO score. There are two metrics in this category: the average age of the account in the report and the age of the oldest account.
- 10%: the type of credit used (installment, rolling, consumer financing, mortgage): Consumers can benefit by having a history of managing different types of credit.
- 10%: Recent searches for credit: credit questions, which occur when a customer submits a credit card or loan (spin or vice versa), may hurt the score, especially if done in large quantities. Individuals who are "spending tariffs" on mortgages, auto loans, or student loans in a short period of time (two weeks or 45 days, depending on the generation of FICO scores used) are unlikely to have a significant decrease in their value as a result of this type of question, because the FICO assessment model considers all kinds of tough questions that occur within 14 or 45 days of each other as just one. Furthermore, mortgages, auto, and student loan questions are not counted at all in FICO scores if they are less than 30 days. While all credit checks are recorded and displayed on a personal credit report for two years, they have no effect after the first year because the FICO rating system ignores them after 12 months. Credit questions made by consumers (such as withdrawing credit reports for personal use), by employers (for employee verification), or by companies initiating credit offerings or pre-screening insurance have no impact on credit scores: these are called "soft investigations" or "soft withdrawal", and does not appear on credit reports used by lenders, only on private reports. The soft questioner is not considered with the credit rating system.
This percentage is based on the importance of five categories for the general population. For certain groups - for example, people who have recently used credit - the relative importance of this category may be different.
Getting a higher credit line can help your credit score. The higher the credit line on the credit card, the lower the average utilization rate for all credit card accounts of the borrower. The utilization ratio is the amount owed divided by the amount extended by the creditor and lower it is the better FICO rating, in general. So if someone has one credit card with a balance of $ 500 and a $ 1,000 limit and another with a $ 700 balance and a $ 2,000 limit, the average ratio is 40 percent ($ 1,200 total used divided by total limit $ 3,000). If the first credit card company raised the limit to $ 2,000, that ratio dropped to 30 percent, which could improve the FICO rating.
There are other special factors that can weigh on FICO scores.
- Any money owed by court decisions, lien taxes, etc., carries additional negative penalties, especially when recently.
- Having one or more recently opened consumer finance credit accounts may also be negative.
Range
There are several types of FICO credit scores: classic or generic, bank cards, personal finance, mortgages, installment loans, auto loans, and NextGen scores. The generic or classic FICO score is between 300 and 850, and 37% of people have between 750 and 850 in 2013, and 56.8% have between 700 and 850 by 2017. According to FICO, the median classic FICO score in 2006 was 723 and 711 in 2011. FICO bankcard scores and automatic FICO scores are between 250 and 900. FICO mortgage rates are between 300 and 850. Higher scores indicate a lower credit risk.
Each individual actually has over 60 credit scores for the FICO rating model because each of the three national credit bureaus, Equifax, Experian and TransUnion, has its own database. Data about individual consumers may vary from bureau to bureau. FICO scores have different names in different credit reporting agencies: Equifax (BEACON), TransUnion (FICO Risk Score, Classical) and Experian (Experian/FICO Risk Model). There are four active generations of FICO scores: 1998 (FICO 98), 2004 (FICO 04), 2008 (FICO 8), and 2014 (FICO 9). Consumers can buy their classic FICO Score 8 for Equifax, TransUnion, and Experian from the FICO website (myFICO), and they will get some free FICO scores at the time (FICO Mortgage Score 2 (2004), FICO Auto Score 8, FICO Auto Score 2 (2004), FICO Bankcard Score 8, FICO Bankcard 2 (2004), FICO classic score 9, FICO Auto Score 9, and FICO Bankcard Score 9). Consumers can also purchase their FICO classic score for Equifax (2004 version, named Score Power) on the credit bureau's website, and their classic FICO 8 Score for Experian on their website. Other types of FICO scores can not be obtained by individuals, only by the lender. Some credit cards offer free FICO scores several times per year to their card holders.
NextGen Risk Score
The NextGen score is a valuation model designed by FICO companies to assess consumer credit risk. The score was introduced in 2001, and in 2003 the second generation of NextGen was released. In 2004, the FICO study showed a 4.4% increase in the number of accounts above the cutoff while simultaneously showing a decrease in the number of bad accounts, the cost-off and the Bankruptcy when compared to traditional FICO. The NextGen FICO score is between 150 and 950.
Each of the major credit agencies markets these scores generated with their data differently:
- Exercise: FICO Advanced Risk Score
- Equifax: Pinnacle
- TransUnion: FICO NextGen Risk Score (formerly Precision)
Before the introduction of NextGen, their FICO score was marketed under a different name:
- Experian: FICO Risk Model
- Equifax: BEACON
- TransUnion: FICO Risk Score, Classic (formerly EMPIRICA)
FICO SBSS
FICO Small Business Scoring Service (SBSS) scores are used to evaluate small business credit applicants. This score can evaluate the business owner's personal credit report along with the business credit report from the business itself. Business financial information can be evaluated as well. The score range for FICO SBSS score is 0-300. Higher scores indicate fewer risks. Applications for SBA 7 (a) a loan of $ 350,000 or less will be screened using this score. A minimum score of 140 is required to pass this prescreen, although most lenders require a score of 160 or less.
VantageScore
In 2006, to try to win the business from FICO, three major credit reporting agencies introduced VantageScore, which is different from FICO in several ways. According to court documents filed in VantageScore VantageScore, VantageScore's market share was less than 6% in 2006. The VantageScore score methodology initially resulted in a score range from 501 to 990 (VantageScore 1.0 and 2.0), but VantageScore 3.0 adopts a range of 300-850 scores in 2013. VantageScore 4.0 has a range of 300-850. Consumers can get free VantageScores from free credit report websites, and from several credit cards issued by Capital One, US Bank, Chase Bank, and USAA Bank.
CE Score
The CE scores are published by CE Analytics and are licensed to sites such as Community Empowerment and iQualifier.com. This score is distributed to 6,500 lenders through Credit Plus network but is free for consumers. It has a range of 350 to 850.
Education credit score
A number of scores have been developed to help consumers understand and improve their credit score. Most were introduced before FICO started sharing their model details and encouraging lenders to share scores with consumers. While these scores can help consumers monitor and improve their scores, these scores do not replicate FICO scores and may be substantially less accurate if they use incomplete data. They also assign different ranges of scores and ratings to consumers, which has created confusion among consumers who expect to have a single score number. Discussions in the myFICO forum and elsewhere refer to non-FICO scores as FAKO scores.
Experian has a Plus Score for educational use only with a score range between 330 and 830. Equifax has an Equifax Credit Score between 280 and 850. TransUnion's New Account Score on Credit Karma's website is between 300 and 850, and the Experian National Equity Score on Credit Sesame and Credit.com ranges from 360-840. CreditXpert offers simulation scores to estimate the impact of various actions on the range of scores of 350 to 850. Some websites (TransUnion, Equifax, Credit Karma, Credit Sesame, etc.) offer credit value to consumers.
Other credit scores
Lenders may choose to use non-FICO credit scores to gain additional insight on consumers, especially those with a limited traditional credit history that may be difficult to assess. These scores can be added to FICO scores if they provide unique insights or are used instead of FICO scores if they provide similar predictions. Most of these scores are based significantly on data not available through national credit bureaus, such as rental data, utilities, and telecommunications payments or public record information such as property and mortgage deeds, liens, private property, tax records, and licensing data.
SageStream's Optical Credit Score combines traditional and alternative credit data with machine learning modeling techniques and ranges from 1 to 999. LexisNexis RiskView scores, based on extensive public records, range from 501 to 900. CoreLogic Credco reports on public records related to properties and ranges from 300 to 850. PRBC allows consumers to register and report their own non-debt payment history. Their credit score ranges from 100 to 850. There are also scores such as ChexSystems that are designed for financial account verification services ranging from 100 to 899.
Maps Credit score in the United States
Free annual credit report
As a result of the FACT Act (Accurate and Accurate Credit Transactions Act), every US legal resident is entitled to a free copy of his credit report from each credit reporting agency once every twelve months. The law requires all three institutions, Equifax, Experian, and Transunion, to provide reports. This credit report does not contain a credit score from any of the three institutions. Three credit bureaus run Annualcreditreport.com, where users can get their free credit report. Non-FICO credit score is available as an additional feature in reports for a fee. This fee is usually $ 7.95, because the FTC manages these fees through the Fair Credit Reporting Act.
Use of non-traditional credit score
Credit scores are often used in determining rates for car insurance and homeowners. Beginning in the 1990s, the national credit reporting agency that generated credit scores has also resulted in more specialized insurance scores, which insurance companies then use to assess potential customer insurance risks. Studies show that the majority of those who are insured pay less in insurance through the use of scores. These studies show that people with higher scores have fewer claims.
In 2009, TransUnion representatives testified before the Connecticut legislature about their practice of marketing credit report scores to employers for use in the recruitment process. Legislators in at least twelve states introduced the law, and three states have passed legislation, to restrict the use of credit checks during the hiring process.
Criticism
Credit scores are widely used because they are cheap and mostly reliable, but they have a failure.
Gamed easily
Since most FICO scores are determined by the credit ratio used for credit available in credit card accounts, one way to increase the score is to increase the credit limit on a person's credit card account.
Not a good risk predictor
Some blame lenders for improperly approving loans for subprime applicants, although there are signs that people with poor scores are at high risk for not repaying the loan. By not considering whether the person is able to pay the payments if they will increase in the future, many of these loans may have put the borrower at risk of default.
Some banks have reduced their dependence on FICO assessments. For example, Golden West Financial (which joined Wachovia Bank in 2006) ignored the FICO score for a more costly analysis of potential borrower assets and employment before lending.
According to experts at MyFico.com, the credit score is enhanced by having many credit cards, the use of credit cards, and have installment loans. However, financially secure people who do not use many credit cards and/or own financial installment types may inaccurately assess a lower credit score.
Use in work decision
Experian, Equifax, TransUnion and their trade associations (Consumer Data Industry Association or "CDIA") have all gone on record that employers do not accept credit scores on credit reports sold for purposes of job screening. The use of credit reports for job screening is permitted in all states, although some have passed laws limiting the practice to only certain positions. Eric Rosenberg, director of state government relations for TransUnion, also stated that there is no research showing statistical correlation between what is on a person's credit report and their job performance or the likelihood of them committing fraud.
Other issues
The use of credit information in connection with proposing different types of insurance or in the background checks of landowners has attracted a number of examinations and similar criticisms. This is because secure job searching, renting suitable accommodations and securing insurance is a basic function of meaningful participation in modern society, and in the case of some types of automated insurance for example, as mandated by law.
See also
- Credit score
- Credit history
- Credit bureau
- Comparison of free credit report websites
- Bankruptcy risk score
- Credit scorecard
- Alternate data
- Experienced trading path
References
External links
- "Credit Score: What You Should Know About Your Own", by Malgorzata Wozniacka and Snigdha Sen (November 2004). Frontline . PBS.
Source of the article : Wikipedia
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