Wikipedia article:Credit score

A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from 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. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.

Australia

In Australia, credit scoring is widely accepted as the primary method of assessing credit worthiness. Credit scoring is not only used to determine whether credit should be approved to an applicant, but credit scoring is also used in the setting of credit limits on credit cards/store cards, in behavioral modelling such as collections scoring, and also in the pre-approval of additional credit to a company's existing client base.

Although logistic (or non-linear) probability modelling is still the most popular means by which to develop scorecards, various other methods offer extremely powerful alternatives, including MARS, CART, CHAID, and random forests.

At present Veda Advantage, the main provider of credit file data, only provides a negative credit reporting system which contains information on applications for credit and adverse listings indicating a default under a credit contract. This makes accurate credit scoring difficult for banks if they have no existing relationship with a prospective borrower.

Canada

The system of credit reports and scores in Canada is very similar to that in the United States, with two of the same reporting agencies active in the country: Equifax and TransUnion (Experian, which had entered the Canadian market with the purchase of Northern Credit Bureaus in 2008, announced the closing of its Canadian operations as of April 18, 2009).

There are, however, some key differences. One such difference is that, unlike the United States, where a consumer is allowed only one free copy of their credit report a year, in Canada, the consumer may order a free copy of their credit report any number of times in a year, as long as the request is made in writing, and as long as the consumer asks for a printed copy to be delivered by mail. This request by the consumer is noted in the credit report, but it has no effect on their credit score. According to Equifax's ScorePower Report, FICO scores range between 300 and 900.

The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. This publication provides sample credit report and credit score documents, with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online at the Financial Consumer Agency of Canada. Paper copies canalso be ordered at no charge for residents of Canada.

United Kingdom

See also: Credit scorecards

The most popular statistical technique used is logistic regression to predict a binary outcome, such as bad debt or no bad debt. Some banks also build regression models that predict the amount of bad debt a customer may incur. Typically, this is much harder to predict, and most banks focus only on the binary outcome.

Credit scoring is only closely regulated by the Financial Services Authority when used for the purposes of the Advanced approach to Capital Adequacy under Basel II regulations.

It is very difficult for a consumer to know in advance whether they have a high enough credit score to be accepted for credit with a particular lender. This is due to the complexity and structure of credit scoring, which differs from one lender to another.

Also, lenders do not have to reveal their credit score head, nor do they have to reveal the minimum credit score required for the applicant to be accepted. Simply due to this lack of information to the consumer, it is impossible for him or her to know in advance if they will pass a lender's credit scoring requirements.

If the applicant is declined for credit, the lender is also not obliged to reveal the exact reason why. However Industry Associations, such as the Finance and Leasing Association, oblige their members to provide a high level reason. Credit bureau data sharing agreements also require that an applicant declined due to credit bureau data is told that this is the reason and the address of the credit bureau must be provided.

United States

Main article: Credit score (United States)

In the United States, a credit score is a number based on a statistical analysis of a person's credit files, that in theory represents the creditworthiness of that person, which is the likelihood that people will pay their bills. A credit score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax. Income is not considered by the major credit bureaus when calculating a credit score.

There are different methods of calculating credit scores. FICO, the most widely known type of credit score, is a credit score developed by FICO, previously known as Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. All credit scores have to be subject to availability. The credit bureaus all have their own credit scores: Equifax's ScorePower, Experian's PLUS score, and TransUnion's credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models.

Studies have shown scores to be predictive of risk in the underwriting of both credit and insurance. Some studies even suggest that most consumers are the beneficiaries of lower credit costs and insurance premiums due to the use of credit scores.

New credit scores have been developed in the last decade by companies such as Scorelogix, PRBC, L2C, etc. which do not use bureau data to predict creditworthiness. Scorelogix's JSS Credit Score uses a different set of risk factors, such as the borrower's job stability, income, income sufficiency, and impact of economy, in predicting credit risk, and the use of such alternative credit scores is on the rise. These new breed of credit scores are often combined with FICO or bureau scores to improve the accuracy of predictions. Most lenders today use some combination of bureau scores and alternative credit scores to develop a better insight into their borrower's ability to pay. It is widely recognized that FICO is measure of past ability to pay and that's why new credit scores that focus more on future ability to pay are being deployed to enhance credit risk models. L2C offers an alternative credit score that uses utilities payment histories to determine creditworthiness and many lenders use this score in addition to bureau scores to make lending decisions. Many lenders use Scorelogix's JSS score in addition to bureau scores since the JSS score factors job and income stability to determine if the borrower will have the ability to repay debt in the future. It is estimated that FICO score will remain the dominant score but in all likelihood it will always be used in conjunction with other alternative credit scores which offer new layers of risk insights.

Usage of credit histories in employment screenings has increased from 19% in 1996 to 42% in 2006. However, credit reports for employment screening purposes do not include credit scores.

Americans are entitled to one free credit report within a 12-month period from each of the three credit bureaus, but are not entitled to receive a free credit score. The three credit bureaus run Annualcreditreport.com, where users can get their free credit reports. Credit scores are available as an add-on feature of the report for a fee. This fee is usually around $10, as the FTC regulates this charge, and the credit bureaus are not allowed to charge an exorbitant fee for their credit score. If the consumer disputes an item on a credit report obtained using the free system, under the Fair Credit Reporting Act (FCRA), the credit bureaus have 45 days to investigate, rather than 30 days for reports obtained otherwise.

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