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Credit Scores: Common Question Answered

FAQ on Credit Score

This article is reproduced from the FTC website at: https://www.consumer.ftc.gov/articles/0152-credit-scores

Comment: This article is compact and relevant information and frequently asked questions. I hope you find and use this information just like me.

Have you ever wondered how lenders will decide whether to give you credit? For years, creditors have been using credit scoring systems to determine the risks of credit cards, car loans and mortgages. Today, other types of businesses, including car and homeowner insurers and telephone companies, are using credit scores to decide whether to issue a policy or to provide you with services and terms. A higher credit score means less risk to you, which means you’re more likely to get credit or insurance – or pay less for that.

What is credit rating?
Credit score and credit report?
How to develop credit rating system?
What can you do to improve your score?
Is the credit scoring system reliable?

What if I have been denied credit or insurance or have not got the terms I want?
The U.S. consumer protection agency, the Federal Trade Commission (FTC), wants you to understand how credit scores work.

What is credit rating?
The credit score is used by system creditors to help determine whether to give you credit. It may also be used to help decide the terms you are offering or the loan interest rates you will pay.

Information about you and your credit experience, such as your billing history, the number and type of accounts you have, whether you pay your bills by due date, your payment behavior, outstanding debt, and the length of your account, from your credit Report collected. Using statistical procedures, creditors compare this information with consumer history of repayments with similar profiles. For example, the credit scoring system provides points for each factor to help predict who is most likely to pay off the debt. Total Credits – Credit Score – Helps predict your creditworthiness: How likely are you to repay a loan and pay when due?

Some insurers also use credit reporting information and other factors to help predict the likelihood of your claim being filed and the amount claimed. When they decide whether to insure, they may consider the information and the premium they charge. Credit ratings used by insurers are sometimes referred to as “insurance points” or “credit insurance points.”

Credit score and credit report

Your credit report is an important part of many credit scoring systems. This is why you ensure that your credit report is accurate. Federal law gives you the right to receive a free credit report every 12 months from every three national credit reporting companies.

The Fair Credit Reporting Act (FCRA) also gives you the power to get your credit score from a national credit reporting company. They are allowed to charge a reasonable fractional fee. When you buy your score, you often get information on how to improve it.

To order a free annual credit report from one or all national credit reporting companies and purchase credit scores, visit www.annualcreditreport.com, call toll-free at 877-322-8228, or fill in the annual credit report application form and mail it to:

Annual Credit Report Request Service
PO. Box 105281
Atlanta, GA 30348-5281

How to develop credit rating system?

In order to develop a credit scoring system or model, creditors or insurers select a random sample of customers and conduct a statistical analysis to identify risk-related characteristics. Then each feature is given a weight, which weight is based on how much the strength of a predictor is and who is a good risk. Each company can use its own scoring model, a different type of credit or insurance scoring model, or a generic model developed by a rating firm.

Under the Equal Credit Opportunities Act (ECOA), certain characteristics, such as race, gender, marital status, nationality or religion, may not be used by the creditor scoring system. The law allows creditors to use their age, but any age-based credit scoring system must give equal treatment to older persons.

What can you do to improve your score?

The credit scoring system is complex and varies by creditor or insurance company and by type of credit or insurance. If one factor changes, your score may change – but improvement usually depends on how that factor is related to other factors considered by the system. Only using the system’s business know what may improve your score under the specific model they use to evaluate your application.

Nonetheless, a scoring model will often consider the following types of information in your credit report to help you calculate your credit score:

Have you paid your bills on time? You can count on payment records is an important factor. If your credit report shows you have paid your bill late, an account has been submitted for payment or is declared bankrupt, your score may be adversely affected.

Are you finally? Many rating systems evaluate your debt amount against your credit limit. If you owe money close to your credit limit, your scores may be negatively affected.

How much credit do you have? In general, the scoring system considers your credit history. Insufficient credit history may negatively impact your score, but factors such as timely payments and low balances can offset this.

Have you recently applied for a new credit? Many scoring systems consider whether or not to apply for credit recently by checking for “inquiries” in the credit report. If you recently applied for too many new accounts, your scores may be negatively affected. Each query is not counted: for example, a credit offer monitoring a creditor’s account in your account or viewing a credit report for “pre-screening” is not considered a liability.

How many credit accounts do you have? What accounts do they have? Although establishing a credit account is generally considered a plus, excessive credit card accounts can have a negative impact on your score. In addition, many rating systems consider the type of credit account you have. For example, in some scoring models, a loan from a finance company may have a negative impact on your credit score.

The scoring model may not be based solely on the information in the credit report. For example, when you apply for a mortgage loan, the system may consider your down payment amount, your total debt, your income, and so on.

It can take some time to significantly improve your score, but it can be done. In order to improve the credit rating of most systems, please pay the bill in time to pay off the balance and stay away from the new debt.

Is the credit scoring system reliable?

The credit scoring system enables creditors or insurers to evaluate millions of applicants with many different characteristics. In order to be statistically valid, these systems must be based on sufficiently large samples. They are usually different in the businesses that use them.

Correctly designed, credit scoring systems are usually able to make faster, more accurate and more informed decisions than individuals. Some creditors have devised their system so that some applicants (low or low enough failing absolutely) are presented to the credit manager who decides whether the company or the lender will be postponed. Referrals may result in discussions and negotiations between credit managers and potential borrowers.

What if I have been denied credit or insurance or have not got the terms I want?

If you are denied credit, ECOA asks the creditor to notify you of the specific reason why the application was denied or, if you request within 60 days, you have the right to be informed of the reason. Creditors are required to be specific: Denial of ambiguity and ambiguity are illegitimate. Acceptable reasons may be “Your income is low” or “Your work time is not long enough.” Unacceptable causes include “You did not meet our minimum standards” or “You did not get enough points on our credit scoring system.”

Occasionally, due to the information in the credit report, you may be denied credit or insurance – or offer less favorable terms. In such cases, FCRA requires creditors or insurance companies to notify you, including the name, address and phone number of the credit reporting company that provided the information. The credit will also be included in the notification if the credit score is a factor in vetoing the credit or providing you with a less favorable terms than most other clients receive. If you receive one of these notices, you are entitled to a copy of the free credit report. Contact the company for what you said in your report. Credit reporting companies can tell you what is your report, but only creditors or insurers can tell you why your application was denied.

  • If a creditor or insurance company says you’re denied credit or insurance because your credit card’s credit is too close, you may need to re-apply after you’ve settled the balance. Since the credit score is based on credit report information, the scores usually change as the information in the credit report changes.
  • If you are denied credit or insurance, or do not get the speed or terms you want, ask the question:
  • If using a credit scoring system, ask creditors or insurance companies. If so, ask what features or factors are used in the system and how to improve your application.
  • If you receive a notice that your credit terms are lower than the credit terms offered to most other consumers, ask your creditors or insurance companies why you did not receive the best offer.
  • If the credit is denied or the best available price available due to inaccuracies in the credit report, be sure to provide the credit reporting company with inaccurate information. To learn more about this permission, see Controversial errors in credit reports.