Credit Scoring

Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan. Fair, Isaac Credit Bureau scores range from approximately 350 to 850 points which allows 500 points to work with to raise a credit score from the least possible, anything under an 850 can be improved. The complex system for reporting and analyzing credit involves many participants: consumers; data repositories; data users; data furnishers; credit reporting agencies; and analytical service providers.

Approximately 190-200 million consumers have credit reports maintained by the three major credit repositories (Equifax, Experian, and Transunion). Data users include lenders, insurers, landlords, utility companies, and employers, who review the credit information in consumers' credit reports to make decisions about extending and pricing credit, offering and pricing insurance policies, providing utility services, rental housing, or offers of employment. Some, but not all, data users are also data furnishers, and regularly report information about consumers' accounts to the credit repositories, who add the information to consumers' credit reports.

In 1996, Congress recognized that errors by data furnishers contributed to credit reporting problems, so the Fair Credit Reporting Act was amended to impose accuracy duties on data furnishers. Credit Reporting Agencies assist some data users by consolidating information from the three credit repositories, and offering services to provide credit reports to data users, and are considered "consumer reporting agencies" under the Fair Credit Reporting Act. Analytic service providers also help data users interpret the information in consumers' files, and include companies such as Fair, Isaac, and Company, which produces analytical tools that generate credit scores. All of these three models are often referred to as the "FICO" scores.

A FICO score is calculated by a system of scorecards. In developing these scorecards, Fair, Isaac uses actual credit data on millions of consumers, and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance. This would be fine except a 2002 study of credit scoring conducted by the Consumer Federation of America and the National Credit Reporting Association concluded that at least one in five consumers are being penalized with lower scores than deserved because of errors or inconsistencies. A study by the Public Interest Research Group found that 29% of credit reports contained errors that could result in the denial of credit (defined as false delinquencies, or reports listing accounts or public records that do not belong to the consumer). The study also found that 41% of reports had incorrect demographic identifying information, and 20% were missing major credit cards, loans, or mortgages. In total, 70% of reports contained an error of some kind.

FICO Factors

35% Bill payment history
30% Amounts owed
15% Lengths of credit history
10% Diversity of accounts
10% New accounts

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