Credit score
Encyclopedia
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 bureau
s.
Lenders, such as bank
s 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.
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.
In the United States, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010. 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 620 has historically 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.
, 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 forest
s.
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.
credit scoring is done as a blacklist. Consumers which did not pay bills end up on the blacklists that are held by different credit bureau
s. Having an entry on the black list may result in the denial of contracts. Just specific branches like telecom carriers use the list on a regular basis. Banks do not use these lists, but rather inquire about securities and income of the consumer when giving out loans.
According to the Austrian Data Protection Act, consumers must opt-in for the use of their private data for any purpose. Consumers can also retrieve the permission to use the data later, which makes any further distribution or use of the collected data illegal. Consumers also have the right to get a free copy of all data held by the credit bureaus once a year. Wrong or unlawfully collected data must be deleted or corrected.
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 can also be ordered at no charge for residents of Canada.
) was incorporated in 2000 by the Government of India
and the Reserve Bank of India
to provide credit information about commercial and consumer borrowers to a limited group of members, including banks, financial institutions, non banking financial companies, housing finance companies and credit card companies.
, 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 get a notice (written or in the form of an 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 made scorecards based on any number of parameters. Credit scores range between 300 and 900.
, with the likes of banks, micro-lenders, clothing retailers, furniture retailers, specialised lenders and insurers all using credit scores. Currently two of the three main retail credit bureau
x offer credit bureau 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).
, a national authority which collects debts. The very appearance of a company as a debtor in this authority, will render a mark among private credit bureaus - however, this does not apply to a private person. This mark is called Betalningsanmärkning (non-payment record) and can according to the law be stored for three years for a private person and five years for a company. This kind of non-payment 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 object to it. Then the one requesting the payment must show the correctness in district court. Failure to object 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 request 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.
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.
s: 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 bureau
s 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.
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.
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 Fair Isaac. Credit scores (including FICO scores) are also made available for "free" through 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 for free from most such services, one must use their 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 FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.
Credit bureau
A credit bureau , or credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill paying habits...
s.
Lenders, such as bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s 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
Bad debt
A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed...
. Lenders use credit scores to determine who qualifies for a loan, at what interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
, 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
Trusted system
In the security engineering subspecialty of computer science, a trusted system is a system that is relied upon to a specified extent to enforce a specified security policy...
.
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
Data mining
Data mining , a relatively young and interdisciplinary field of computer science is the process of discovering new patterns from large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics and database systems...
, which uses many similar techniques.
FICO
Fico
Fico may refer to:* Fair Isaac Corporation , an American company* FICO score, a credit score developed by Fair Isaac Corporation * Hurricane Fico, a hurricane in the 1978 Pacific hurricane season...
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.
Score interpretation
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 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, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010. 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 620 has historically 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.
Australia
In AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, 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
Logistic function
A logistic function or logistic curve is a common sigmoid curve, given its name in 1844 or 1845 by Pierre François Verhulst who studied it in relation to population growth. It can model the "S-shaped" curve of growth of some population P...
(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
Multivariate adaptive regression splines
Multivariate adaptive regression splines is a form of regression analysis introduced by Jerome Friedman in 1991. It is a non-parametric regression techniqueand can be seen as an extension of linear models that...
, CART, CHAID
CHAID
CHAID is a type of decision tree technique, based upon adjusted significance testing . The technique was developed in South Africa and was published in 1980 by Gordon V. Kass, who had completed a PhD thesis on this topic...
, and random forest
Random forest
Random forest is an ensemble classifier that consists of many decision trees and outputs the class that is the mode of the class's output by individual trees. The algorithm for inducing a random forest was developed by Leo Breiman and Adele Cutler, and "Random Forests" is their trademark...
s.
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.
Austria
In AustriaAustria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
credit scoring is done as a blacklist. Consumers which did not pay bills end up on the blacklists that are held by different credit bureau
Credit bureau
A credit bureau , or credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill paying habits...
s. Having an entry on the black list may result in the denial of contracts. Just specific branches like telecom carriers use the list on a regular basis. Banks do not use these lists, but rather inquire about securities and income of the consumer when giving out loans.
According to the Austrian Data Protection Act, consumers must opt-in for the use of their private data for any purpose. Consumers can also retrieve the permission to use the data later, which makes any further distribution or use of the collected data illegal. Consumers also have the right to get a free copy of all data held by the credit bureaus once a year. Wrong or unlawfully collected data must be deleted or corrected.
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: EquifaxEquifax
Equifax Inc. is a consumer credit reporting agency in the United States, considered one of the three largest American credit agencies along with Experian and TransUnion. Founded in 1899, Equifax is the oldest of the three agencies and gathers and maintains information on over 400 million credit...
and TransUnion
TransUnion
TransUnion is the third largest credit bureau in the United States, which offers credit-related information to potential creditors. Like major competitors Equifax and Experian, TransUnion markets credit reports directly to consumers.- History :...
(Experian
Experian
Experian plc, formerly known as CCN Systems, is a global credit information group with operations in 36 countries. The company employs 15,500 people with corporate headquarters in Dublin, Ireland and operational headquarters in Nottingham, England and Costa Mesa, California, US...
, 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
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
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
Identity theft
Identity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
has occurred. The publication is available online at the Financial Consumer Agency of Canada
Financial Consumer Agency of Canada
The Financial Consumer Agency of Canada is an independent government agency of the Government of Canada. FCAC provides consumer information and oversees financial institutions to ensure that they comply with federal consumer protection measures. Created in 2001, the Agency investigates cases of...
. Paper copies can also be ordered at no charge for residents of Canada.
India
The Credit Information Bureau (India) Limited (CIBILCIBIL
CIBIL is India's first credit information bureau. Its a repository of information, which contains the credit history of commercial and consumer borrowers...
) was incorporated in 2000 by the Government of India
Government of India
The Government of India, officially known as the Union Government, and also known as the Central Government, was established by the Constitution of India, and is the governing authority of the union of 28 states and seven union territories, collectively called the Republic of India...
and the Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
to provide credit information about commercial and consumer borrowers to a limited group of members, including banks, financial institutions, non banking financial companies, housing finance companies and credit card companies.
Norway
In NorwayNorway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, credit scoring services are provided by three credit scoring agencies: Dun & Bradstreet
Dun & Bradstreet
Dun & Bradstreet is a Fortune 500 public company headquartered in Short Hills, New Jersey, USA that provides information on businesses and corporations for use in credit decisions, B2B marketing and supply chain management...
, Experian
Experian
Experian plc, formerly known as CCN Systems, is a global credit information group with operations in 36 countries. The company employs 15,500 people with corporate headquarters in Dublin, Ireland and operational headquarters in Nottingham, England and Costa Mesa, California, US...
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 get a notice (written or in the form of an 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 made scorecards based on any number of parameters. Credit scores range between 300 and 900.
South Africa
Credit scoring is used throughout the credit industry in South AfricaSouth Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
, with the likes of banks, micro-lenders, clothing retailers, furniture retailers, specialised lenders and insurers all using credit scores. Currently two of the three main retail credit bureau
Credit bureau
A credit bureau , or credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill paying habits...
x offer credit bureau scores. TransUnion
TransUnion
TransUnion is the third largest credit bureau in the United States, which offers credit-related information to potential creditors. Like major competitors Equifax and Experian, TransUnion markets credit reports directly to consumers.- History :...
(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
Experian
Experian plc, formerly known as CCN Systems, is a global credit information group with operations in 36 countries. The company employs 15,500 people with corporate headquarters in Dublin, Ireland and operational headquarters in Nottingham, England and Costa Mesa, California, US...
South Africa likewise have a Delphi credit score with their fourth generation about to be released (late 2010).
Sweden
Sweden also has a system for credit score. This system aims to find people with bad payment attitude. It has only two levels, good and bad. Anyone who does not pay a requested debt payment on time, and also not after a reminder, will have their case forwarded to the Swedish Enforcement AdministrationSwedish Enforcement Administration
The Swedish Enforcement Administration is a government agency handling all debt collection in Sweden.The Swedish Enforcement Administration is the only organization in Sweden empowered to withdraw money from bank accounts of debtors and, if necessary, visit the homes and companies of debtors to...
, a national authority which collects debts. The very appearance of a company as a debtor in this authority, will render a mark among private credit bureaus - however, this does not apply to a private person. This mark is called Betalningsanmärkning (non-payment record) and can according to the law be stored for three years for a private person and five years for a company. This kind of non-payment 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 object to it. Then the one requesting the payment must show the correctness in district court. Failure to object 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 request unless payment has already been made.
Every person with a Swedish national identification number
National identification number
A national identification number, national identity number, or national insurance number is used by the governments of many countries as a means of tracking their citizens, permanent residents, and temporary residents for the purposes of work, taxation, government benefits, health care, and other...
must register a valid address, even if living abroad, since sent letters are considered to have arrived. For example, the Swedish astronaut Christer Fuglesang
Christer Fuglesang
Dr. Arne Christer Fuglesang is a Swedish physicist and an ESA astronaut. He was first launched aboard the STS-116 Space Shuttle mission on December 10, 2006, at 01:47 GMT, making him the first Swedish citizen in space....
has a Betalningsanmärkning since he forgot to pay the Stockholm congestion tax
Stockholm congestion tax
The Stockholm congestion tax , also found referred to as the Stockholm congestion charge, is a congestion pricing system implemented as a tax levied on most vehicles entering and exiting central Stockholm, Sweden...
, and had an old invalid address registered, since he lives in the USA. Letters with payment requests did not reach him on time.
United Kingdom
The most popular statistical technique used is logistic regressionLogistic regression
In statistics, logistic regression is used for prediction of the probability of occurrence of an event by fitting data to a logit function logistic curve. It is a generalized linear model used for binomial 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
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
when used for the purposes of the Advanced approach to Capital Adequacy under Basel II
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
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
Finance and Leasing Association
The Finance and Leasing Association is the leading trade association for the UK consumer credit, motor finance and asset finance sectors, and the largest organisation of its type in Europe. Members of FLA include: banks, subsidiaries of banks and building societies, the finance arms of retailers...
, 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
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 bureauCredit bureau
A credit bureau , or credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill paying habits...
s: Experian
Experian
Experian plc, formerly known as CCN Systems, is a global credit information group with operations in 36 countries. The company employs 15,500 people with corporate headquarters in Dublin, Ireland and operational headquarters in Nottingham, England and Costa Mesa, California, US...
, TransUnion
TransUnion
TransUnion is the third largest credit bureau in the United States, which offers credit-related information to potential creditors. Like major competitors Equifax and Experian, TransUnion markets credit reports directly to consumers.- History :...
, and Equifax
Equifax
Equifax Inc. is a consumer credit reporting agency in the United States, considered one of the three largest American credit agencies along with Experian and TransUnion. Founded in 1899, Equifax is the oldest of the three agencies and gathers and maintains information on over 400 million credit...
. 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
Fair Isaac
Fair Isaac Corporation is a public company that provides analytics and decision making services—including credit scoring—intended to help financial services companies make complex, high-volume decisions.- History :...
. 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 bureau
Credit bureau
A credit bureau , or credit reference agency is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals' borrowing and bill paying habits...
s all have their own credit scores: Equifax
Equifax
Equifax Inc. is a consumer credit reporting agency in the United States, considered one of the three largest American credit agencies along with Experian and TransUnion. Founded in 1899, Equifax is the oldest of the three agencies and gathers and maintains information on over 400 million credit...
's ScorePower, Experian
Experian
Experian plc, formerly known as CCN Systems, is a global credit information group with operations in 36 countries. The company employs 15,500 people with corporate headquarters in Dublin, Ireland and operational headquarters in Nottingham, England and Costa Mesa, California, US...
's PLUS score, and TransUnion
TransUnion
TransUnion is the third largest credit bureau in the United States, which offers credit-related information to potential creditors. Like major competitors Equifax and Experian, TransUnion markets credit reports directly to consumers.- History :...
's credit score, and each also sells the VantageScore
VantageScore
VantageScore is the name of a credit rating product that is offered by the three major credit bureaus . The product was unveiled by the three bureaus on 14 March 2006...
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.
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
Annualcreditreport.com
Annualcreditreport.com is a website jointly operated by the three major U.S. credit reporting agencies, Equifax, Experian, and TransUnion. The site was created in order to comply with their obligations under the Fair and Accurate Credit Transactions Act to provide a mechanism for American...
, 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 Fair Isaac. Credit scores (including FICO scores) are also made available for "free" through subscription to one of the many credit report monitoring
Credit report monitoring
Credit report monitoring is the monitoring of one's credit history in order to detect any suspicious activity or changes. Companies offer such service on a subscription basis, typically granting regular access to one's credit history, alerts of critical changes to one's credit history, and...
services available from the credit bureaus or other third parties, although to actually get the scores for free from most such services, one must use their 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
Washington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
were offered a free FICO score each month through the bank's Web site. (Chase
Chase (bank)
JPMorgan Chase Bank, N.A., doing business as Chase, is a national bank that constitutes the consumer and commercial banking subsidiary of financial services firm JPMorgan Chase. The bank was known as Chase Manhattan Bank until it merged with J.P. Morgan & Co. in 2000...
, which took over Washington Mutual in 2008, discontinued this practice in March, 2009.)Chase
Chase (bank)
JPMorgan Chase Bank, N.A., doing business as Chase, is a national bank that constitutes the consumer and commercial banking subsidiary of financial services firm JPMorgan Chase. The bank was known as Chase Manhattan Bank until it merged with J.P. Morgan & Co. in 2000...
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
Fair Credit Reporting Act
The Fair Credit Reporting Act is a United States federal law that regulates the collection, dissemination, and use of consumer information, including consumer credit information. Along with the Fair Debt Collection Practices Act , it forms the base of consumer credit rights in the United States...
, 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
Wall Street reform
Wall Street Reform or Financial Reform was signed by President of the United States Barack Obama on July 22, 2010. Since the economic crisis of 2007-09 , there was an ongoing debate taking place regarding the insufficient oversight and regulation of the US financial system, non-regulated...
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 FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.
See also
- Credit historyCredit historyCredit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy...
- Credit referenceCredit referenceA credit reference is information, the name of an individual, or the name of an organization that can provide details about an individual's past track record with credit...
- Credit scorecardsCredit ScorecardsCredit scorecards are mathematical models which attempt to provide a quantitative estimate of the probability that a customer will display a defined behavior Credit scorecards are mathematical models which attempt to provide a quantitative estimate of the probability that a customer will display a...
- Alternative dataAlternative dataIn economic policy, alternative data refers to the inclusion of non-financial payment reporting data in credit files, such as telecom and energy utility payments. Only 39 of 178 economies have credit bureaus that currently track alternative data....
- Credit rating agencyCredit rating agencyA Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...