 |
Scoring Some Credit
By Jill Terry
 In
1956, two guys with a penchant for statistics devised a system
to predict whether certain people would pay their bills. Bill
Fair and Earl Isaac founded Fair, Isaac and Company, and credit
scoring was born.
But what is it and how does it affect you, the credit applicant?
Scorecards are created by companies like Fair, Isaac and Company
(or FICO) using statistical information based on the performance
of consumers with similar profiles. The scoring system (or
card) awards points for high performance according to certain
factors. The total number of points an applicant scores indicates
the probability that the applicant will repay his or her debt.
You might wonder what these mysterious factors are and how
the scorecards are compiled. The law allows any "empirically
derived, statistically sound" variable to be a factor in a
credit scoring system--this phrase simply means that the variable
has been tested thoroughly enough to prove that it's reliable
as a predictor of debt repayment.
Although race, religion, gender, and marital status cannot
be used as variables, age can be. Surprisingly, even occupation,
employment history, and education level may serve as components
in a credit scoring system. Not surprisingly, your credit
history is generally the most heavily weighted factor.
FICO develops generic scorecards that it sells to those in
the business of extending credit, but it also customizes scorecards
for companies with enough lending history to fit the "empirically
derived, statistically sound" category. In other words, not
all scorecards are the same. What may matter to one bank may
not matter as much or at all to another. This variation makes
it difficult to know how you'll rate when you apply for credit
at any given financial institution.
Banks vary in how heavily they rely on credit scoring systems.
Larger banks often rely exclusively on electronic credit-scoring
systems because of the speed they offer. Other financial institutions
may use credit-scoring systems to cull the "first cut" of
applicants: those who score above a pre-determined amount
automatically get approved while those at the very bottom
of the scale are declined. Applicants who fall in the middle
range are then evaluated by a bank employee.
Supporters of credit-scoring systems cite objectivity as
the system's primary benefit. In an industry where allegations
of discrimination have long been present, credit-scoring systems
insure that standards will be applied equally and without
regard to race, religion, gender, or marital status. System
detractors, however, aren't so easily convinced. Because the
process is automated, oversights and glitches do occur on
occasion, leading some people to claim that credit-scoring
systems are too impersonal to be reliable or useful. So, how
can you be sure to score high enough to get the credit you
seek? Credit is credit, no matter how it's evaluated, so the
old rules under more judgmental systems also apply to credit-scoring
systems. Here's a brief list to help you secure a higher score:
- Try to check your credit report for accuracy before you
apply for a loan. Because credit-scoring systems rely so
heavily on credit report information, you'll want to ensure
that yours is correct.
- Stay current with your bill payments. Late payments can
ruin your score.
- Don't collect credit cards. Just use what you need. Credit-scoring
systems frequently count credit cards, with the expectation
that if you have the credit, you may eventually use it.
- Keep a safe distance from your credit limit on every credit
card. High balances count against you.
- Don't apply for substantial amounts of credit in a short
period of time. Credit-scoring systems view inquiries from
other creditors as an intent to charge up a storm.
|
|
