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Credit Report Score FAQs

What is credit scoring?

Credit scoring is a method of measuring the probability that a consumer will default in the future on a loan or credit obligation.

Why is Credit Scoring used?

Since credit scoring is based on real data and outcomes, it is reasonably objective in predicting the probability of a loan default, especially when averaged over a group of loans.

How is a Credit Scoring model developed?

To predict the probability of default, the scoring system uses statistics, and it compares the actual experience of a random group of credit reports in an earlier period to that same group of credit reports as it appears in a later period to see how many of the credit reports had loan defaults in the later period, and if there are measurable factors in the defaulting credit reports versus the non-defaulting credit reports.

Credit scoring is not allowed to use discriminatory factors such as race, sex, marital status, national origin, or religion in their credit scoring algorithm, however age may be a factor in some credit scoring systems as allowed by law.

How reliable is the credit scoring system?

Since credit scoring is only a statistical tool that predicts performance, it cannot guarantee performance because no one can predict the future with 100% accuracy. So in individual circumstances a person with a low score may may never default in the future on a credit obligation, whereas a person with a high score may in fact default on an obligation in the future.

However, a credit scores become more accurate as the number of loans increases, so a group of loans with similar credit scores will have a more predictable loan default probability or default rate. This is useful to lenders as they can assign an interest rate to similar borrowers with comparable credit scores

What happens if you are denied credit or don't get the terms you want?

If you are denied credit, the creditor who denied you will generally tell why your application was denied. If you are denied based on your credit report, you are entitled to free copy of your credit report.

If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor why this happened. In some cases there may be inaccurate information in your credit report that you will need to dispute.

Because your credit report is the basis for your credit score, it is very important to make sure your report is accurate before you submit a credit application.

Here are some more credit report score faqs that may help you:

  1. Credit scores are based on your credit report. A good credit score, also known as a credit risk score, generally requires good credit on your credit report. If possible, that means no lates, no collections, no bankruptcies, and no public records. Of course if you already have these “derogatory” items, try to minimize them. Keep in mind it also helps your credit score as the items of bad credit “age” or get older. That means older bad credit may not lower your score as much as recent bad credit. However it is not always that simple. Bottomline, you will need good credit to get a good credit score.
  2. Since your credit report credit score measures the “risk” you will default on an obligation, a good credit score requires other factors on your credit report that imply you are a good risk. That means even someone with a perfect payment record may still be scored as “risky”. For example “risky” credit reports may have too much credit, or high credit balances, or lots of inquiries. Unfortunately these factors are scored relative to your entire credit report, so too much credit for one person may be okay for another.
  3. Credit scores not only affect your eligibility for credit but also the interest rate for your credit. So even if you may qualify for a loan with a lower credit score, it may be at a higher interest rate because of your lower score. Higher credit scores qualify for the best programs with the best terms and the lowest interest rates.
  4. Credit scores are not only used for loans but also for rentals, insurance, and utilities. Sometimes in these cases your score affects your eligibility; other times it affects the deposit amount required. The best rates and terms may require higher credit scores.
  5. Credit scores do not include factors such as age, gender, marital status, national origin, race, or religion. Such factors are generally protected by anti-discrimination laws and may not lawfully affect your credit score.
  6. Credit scores do not factor in your job, income or employment history. Credit Scores do not factor in your educational background.  Credit scores are not influenced by where you live.
  7. There are three national credit reporting agencies – Equifax, Experian, and Transunion. Since your credit score is based on your credit report, you really have three credit scores to keep track of – one for each of the three agencies.
  8. Credit scores may penalize you to some degree for applying for new credit such as applying for loans and credit cards, but it does not penalize you for all inquiries into your credit.  For example, ordering your own credit report does not count against you. Also requests for employment purposes does not count against you.  And requests for your credit report from existing lenders may not count against you.  Basically what counts against you is inquiries into your credit for new credit arrangements.