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A credit score is a numerical expression based on a level 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 much overlap with data mining, which uses many similar techniques. These techniques combine thousands of factors but are similar or identical.
In Australia, credit scoring is widely accepted as the primary method of assessing creditworthiness. Credit scoring is used not only to determine whether credit should be approved to an applicant, but for credit scoring in the setting of credit limits on credit or 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 powerful alternatives, including MARS, CART, CHAID, and random forests.
At present Veda Advantage, the main provider of credit file data, provides only a negative credit reporting system that 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.
In Austria credit scoring is done as a blacklist. Consumers who did not pay bills end up on the blacklists that are held by different credit bureaus. Having an entry on the black list may result in the denial of contracts. Certain enterprises including telecom carriers use the list on a regular basis. Banks also use these lists, but rather inquire about security and income when considering loans. Beside these lists several agencies and credit bureaus provide credit scoring of consumers.
According to the Austrian Data Protection Act, consumers must opt-in for the use of their private data for any purpose. Consumers can also withhold permission to use the data later, making illegal any further distribution or use of the collected data. Consumers also have the right to receive a free copy of all data held by credit bureaus once a year. Wrong or unlawfully collected data must be deleted or corrected.
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 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 is that, unlike in 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 can also be ordered at no charge for residents of Canada.
In India, there are four credit information companies licensed by Reserve Bank of India. The Credit Information Bureau (India) Limited (CIBIL) has functioned as a Credit Information Company from January 2001. Subsequently in 2010, Experian, Equifax and Highmark were given licenses by Reserve Bank of India to operate as Credit Information Companies in India.
Although all the four credit information companies have developed their individual credit scores, the most popular is CIBIL credit score. The CIBIL credit score is a three-digit number that represents a summary of individuals' credit history and credit rating. This score ranges from 300 to 900, with 900 being the best score. Individuals with no credit history will have a score of -1. If the credit history is less than six months, the score will be 0. CIBIL credit score takes time to build up and usually it takes between 18 and 36 months of credit usage to obtain a satisfactory credit score.
In Norway, credit scoring services are provided by three credit scoring agencies: Dun & Bradstreet, Experian and Lindorff Decision. Credit scoring is based on publicly available information such as demographic data, tax returns, taxable income and any Betalingsanmerkning (non-payment records) that might be registered on the credit-scored individual. Upon being scored, an individual will receive a notice (written or by e-mail) from the scoring agency stating who performed the credit score as well as any information provided in the score. In addition, many credit institutions use custom scorecards based on any number of parameters. Credit scores range between 300 and 900.
Credit scoring is used throughout the credit industry in South Africa, with the likes of banks, micro-lenders, clothing retailers, furniture retailers, specialised lenders and insurers all using credit scores. Currently all four retail credit bureaux offer credit bureau scores. The data stored by the credit bureaus include both positive and negative data, increasing the predictive power of the individual scores. TransUnion (formerly ITC) offer the Empirica Score which is, as of mid-2010, in its 4th generation. The Empirica score is segmented into two suites: the account origination (AO) and account management (AM). Experian South Africa likewise have a Delphi credit score with their fourth generation about to be released (late 2010). Compuscan released CompuScore ABC in 2011. The scoring suite predicts the probability of customer default throughout the credit lifecycle.
Sweden also has a system for credit scoring that aims to find people with bad payment histories. It has only two levels, good and bad. Anyone who does not make debt payments on time, and continues not to make payments after they are reminded, will have their case forwarded to the Swedish Enforcement Administration (Swedish: Kronofogdemyndigheten) which is a national authority for debt collection. The mere appearance of a company as a debtor to this authority will result in a record among private credit bureaus; however, this does not apply to a private person. This record is called Betalningsanmärkning (non-payment record) and by law can be stored for three years for a private person and five years for a company. This kind of nonpayment record will make it very difficult to get a loan, a rental apartment, a telephone subscription, or a job with cash handling. The banks, of course, use income and asset figures in connection with loan assessments.
If one gets an injunction to pay by the Enforcement Administration, it is possible to dispute it. Then the party requesting the payment must show its correctness in district court. Failure to dispute is seen as admitting the debt. If the debtor loses the court trial, costs for the trial are added to the debt. Taxes and authority fees must always be paid on demand unless payment has already been made.
Every person with a Swedish national identification number must register a valid address, even if living abroad, since sent letters are considered to have arrived. For example, the Swedish astronaut Christer Fuglesang has a Betalningsanmärkning since he forgot to pay the Stockholm congestion tax, and had an old invalid address registered, since he lives in the USA. Letters with payment requests did not reach him on time.
The most popular statistical technique used is logistic regression to predict a binary outcome: 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 closely regulated in the UK, with the industry regulator being the Information Commissioner’s Office (ICO). Consumers can also send complaints to the Financial Ombudsman Service if they experience problems with any Credit Reference Agency.
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 given lender. This situation is due to the complexity and structure of credit scoring, which differs from one lender to another.
Lenders need not reveal their credit score head, nor need they reveal the minimum credit score required for the applicant to be accepted. Owing only 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 not obliged to reveal the exact reason why. However industry associations including the Finance and Leasing Association oblige their members to provide a satisfactory reason. Credit-bureau data sharing agreements also require that an applicant declined based on credit-bureau data is told that this is the reason and the address of the credit bureau must be provided.
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 score, 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 must be subject to availability. The credit bureaus all have their own credit scores: Equifax's ScorePower ( FICO score from Equifax ), Equifax Credit Score, 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, Innovis 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 types 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 better understanding of a borrower's ability to pay. It is widely recognized that FICO is a measure of past ability to pay. 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 utility 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, given that the JSS score incorporates job and income stability to determine whether the borrower will have the ability to repay debt in the future. It is thought that the FICO score will remain the dominant score, but it will likely be used in conjunction with other alternative credit scores that offer other pictures of risk.
Americans are entitled to one free credit report in every 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.
Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their FICO score directly from FICO. Credit scores (including FICO scores) are also made available free by subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores free from most such services, one must use a credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge. Until March 2009, holders of credit cards issued by Washington Mutual were offered a free FICO score each month through the bank's Web site. (Chase, which took over Washington Mutual in 2008, discontinued this practice in March, 2009.)Chase resumed the practice of offering a free FICO score in March, 2010 of select card members to the exclusion of the majority of former WAMU card holders.
Under the Fair Credit Reporting Act, a consumer is entitled to a free credit report (but not a free credit score) within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit score. Under the Wall Street reform bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score.
The generic FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.
The first step to interpreting a score is to identify the source of the credit score and its use. There are numerous scores based on various scoring models sold to lenders and other users. The most common was created by Fair Isaac Co. and is called the FICO score. FICO is a publicly traded corporation (under the ticker symbol FICO) that created the best-known and most widely used credit score model in the United States. FICO produces scoring models that are most commonly used, and which are installed at and distributed by the three largest national credit repositories in the U.S (TransUnion, Equifax and Experian) and the two national credit repositories in Canada (TransUnion Canada and Equifax Canada). FICO controls the vast majority of the credit score market in the United States and Canada although there are several other competing players that collectively share a very small percentage of the market.
In the United States, generic FICO scores range from 300-850, with 711 being the median FICO score of Americans in 2011. The performance definition of the FICO risk score (its stated design objective) is to predict the likelihood that a consumer will go 90 days past due or worse in the subsequent 24 months after the score has been calculated. The higher the consumer's score, the less likely he or she will go 90 days past due in the subsequent 24 months after the score has been calculated. Because different lending uses (mortgage, automobile, credit card) have different parameters, FICO algorithms are adjusted according to the predictability of that use. For this reason, a person might have a higher credit score for a revolving credit card debt when compared to a mortgage credit score taken at the same point in time.
The interpretation of a credit score will vary by lender, industry, and the economy as a whole. While 640 has been a divider between "prime" and "subprime", all considerations about score revolve around the strength of the economy in general and investors' appetites for risk in providing the funding for borrowers in particular when the score is evaluated. In 2010, the Federal Housing Administration (FHA) tightened its guidelines regarding credit scores to a small degree, but lenders who have to service and sell the securities packaged for sale into the secondary market largely raised their minimum score to 640 in the absence of strong compensating factors in the borrower's loan profile. In another housing example, Fannie Mae and Freddie Mac began charging extra for loans over 75% of the value that have scores below 740. Furthermore, private mortgage insurance companies will not even provide mortgage insurance for borrowers with scores below 660. Therefore, "prime" is a product of the lender's appetite for the risk profile of the borrower at the time that the borrower is asking for the loan.
Several factors affect individual's credit scores. One factor is the amount an individual borrowed as compared to the amount of credit available to the individual. As an individual borrows, or leverages, more money, the individual's credit score decreases.
- Credit history
- Credit reference
- Credit scorecards
- Alternative data
- Credit rating agency
- Credit Bureau
Notes and references
- § 8 Abs 1 Z2 DSG
- § 26 DSG
- §§ 27 and 28 DSG
- "Experian Canada home page". Retrieved 2011-02-01.
- Drake, Tom. "Experian Closes Their Canadian Consumer Credit Bureau". Canadian Finance Blog. Retrieved 2011-02-01.
- Equifax form (Canada)
- TransUnion form (Canada)
- Understanding Your Credit Report and Credit Score (Canada)
- Reserve Bank of India
- Reserve Bank of India
- Reserve Bank of India
- How to interpret your CIBIL credit score
- Hulland, Louise. "Credit Reference Agencies". BBC.
- Report to the Congress on credit scoring and its effects on the availability and affordability of credit
- Credit-based insurance scores: Impacts on consumers of automobile insurance
- No evidence of disparate impact in Texas due to use of credit information by personal lines insurers
- An overview of consumer data and credit reporting
- Wernau, Julie (2010-04-28). "TransUnion battling attempts to ban employment credit checks". Chicago Tribune. Retrieved 23 October 2011.
- Equifax Credit Report Dispute FAQs retrieved on 2008-12-18
- FICO scores retrieved on 2008-12-18
- Chase drops WaMu secured card, FICO score retrieved on 2009-01-17
- President Obama on Final Passage of Wall Street Reform: An End to Bailouts, a Beginning for Accountability published July 15, 2010, retrieved on July 26, 2010.
- The VantageScore Model retrieved on 2008-12-16