Credit Scoring techniques revealed

izools

PROLIANT wrote: »

I am not asking for a live example from a major UK bank, just some insight to attempt to de-mystify the scoring techniques used e.g. how many searches are considered too many and in what time scale, why are searches viewed as a negative, why cant banks use unrecorded searches to give a credit decision and if successful then apply a foot print? How they justify a rejection based on certain data sets etc.

No one aspect makes a decision, it is only the conglomeration of all the data fed into a weighting and scoring system that will create a definite answer.

The methodology behind this weighting and scoring system is based on that lenders experience with customers of a similiar profile to the applicant and their account performance. This is likely to change as time progresses and will depend on the market that the lender / brand targets.

Different scoring models may not work as effectively with a separate market as it does with the target market for that credit based product.

Credit scoring is far far far more complicated and an ingrained process than to be able to single out a single piece of data / criteria and place relevance on that one piece of data alone, i.e. searches.

EDIT: For example, my Equifax score data shows almost identical information to yours - good account, no derogatory data. Mediocre electoral roll, registered but under 36 months. Poor searches as I've had six in as many months, and excellent court data as none are recorded on my EQ file.

However - my Equifax score is only 280. Why? I would expect we differ in two areas - I have had four accounts opened in the last six months - recently taken on board four new agreements that I've not had for long enough for a potential creditor to judge whether or not I will be able to handle just yet - as such the recent searches have a bigger impact on me than you... Such things happen across the whole range of criteria used to calculate a score.

soul619

never-in-doubt wrote: »

Not at all. I work within banking financial crime and wouldn't be big headed if I said I was bl00dy good at what I do and trust me - you must have an open mind to succeed - your attitude will get you nowhere, but then that's probably why I earn 5x what you do!

Bear in mind your audience before making meaningless or otherwise posts.... ;)

I found £100k last night, no ulterior motive at all. Had I went in with that attitude then you know what? I'd still be there now trawling data reports searching for staff fraud when you know what? It took 3 hours using data abnormality filters against the actual banks own systems.... i.e. the £100k was in "limbo" within their own systems - no fraud, simple accounting problem.

I think my point here is made.

i doubt that mate im bloody good at my job too!

and 3 hours... thats a hell of a long time to figure it out lol

Innocent_Guy

Nice thread Pro!

never-in-doubt

soul619 wrote: »

i doubt that mate im bloody good at my job too!

and 3 hours... thats a hell of a long time to figure it out lol

Really? Ok, if you want to remain private PM me and lets name each other - I am referring to the Banking & Security Internal Audit top 100 - my name is on there.

I assume yours will be too then? Yes? Or tell me who you work for, one of 3 companies will do it unless you mean you're a fraud and risk manager for an actual bank in which case then I think you'll know you hire people like me to come in and sort the issues!

So, which is to be then? :rotfl:


edit: sorry Proliant for spoiling thread. I'll leave it now. Point is, what you're asking is not to encourage fraud, we understand that.

never-in-doubt

soul619 wrote: »

i doubt that mate im bloody good at my job too!

and 3 hours... thats a hell of a long time to figure it out lol

Thanks for PM, due to content of said PM I accept that you may well know what you're on about and therefore apologise for my rant. :beer::beer:


p.s. but I do earn more than ya! :rotfl::rotfl:

PROLIANT

izools wrote: »

No one aspect makes a decision, it is only the conglomeration of all the data fed into a weighting and scoring system that will create a definite answer.

The methodology behind this weighting and scoring system is based on that lenders experience with customers of a similiar profile to the applicant and their account performance. This is likely to change as time progresses and will depend on the market that the lender / brand targets.

Different scoring models may not work as effectively with a separate market as it does with the target market for that credit based product.

Credit scoring is far far far more complicated and an ingrained process than to be able to single out a single piece of data / criteria and place relevance on that one piece of data alone, i.e. searches.

I understand the overall complexity of the model however in order to understand the systems used I am trying to gather information at a much higher level before delving deeper.

soul619

never-in-doubt wrote: »

Thanks for PM, due to content of said PM I accept that you may well know what you're on about and therefore apologise for my rant. :beer::beer:


p.s. but I do earn more than ya! :rotfl::rotfl:

10 years ill be your boss

izools

PROLIANT wrote: »

I understand the overall complexity of the model however in order to understand the systems used I am trying to gather information at a much higher level before delving deeper.

Although your question simply does not have an answer other than "it depends on the rest of the data supplied on the application and gathered from your credit file, and depends on the scoring model used".

You can't put a fixed value of necessity on one minor criteron of a much larger complex model

It's like saying "I have twenty values, A through T. What value does D have to be for the total to be 100?" - there's no way to know without knowing the other values. And each value may not represent 1/20th of the total. Some may be weighted higher than others. Whilst A may contribute 5% toward the total, B may be weighted as 12% and C may be weighted as 1%.

AFAIK you have to look at the system from the other end to appreciate how it works

PROLIANT

Found this information, although it is American the science is still the same.


Secrets of FICO Credit Scoring Revealed ... Finally!



Shrouded in mystery for years, the Fair Isaac Company has finally let consumers have a slight peek into the vault of their credit scoring model which is responsible for "FICO Scores," otherwise known as your credit score. (FICO, by the way, is a shortened version of "Fair Isaac Company".)

FICO's revelation of information comes at an interesting crossroads for the Fair Isaac Company. Just last month, Fair Isaac lost a case against credit bureau giant Experian in Minneapolis, in which Fair Isaac was attempting to prevent Experian from using a scoring model with a similar point range (300 to 850) as is used by Fair Isaac.

Personally, I believe that Fair Isaac's decision to now begin to release tidbits of its credit scoring model has more to do with wanting to avoid the negative public relations image of being "the wizard behind the curtain," and less to do with wanting to service consumers. Fair Isaac has had it scoring model for decades hidden in the deepest vaults; the timing of its decision to finally begin to release parts of it suggests to me motivations grounded more in competition than in any desire to enlighten the millions of consumers they confuse and damage on a daily basis.

The Traditional Information on How FICO Calculates Credit Scores

FICO has for some years published on its website a broad outline of how it calculates credit scores. This information is a good general recipe but generally does not provide consumers with specific information for rapidly improving their credit scores, as is often necessary when time-sensitive loan applications are pending. Here is the traditional information:

-35% of the score comes from payment history: have you paid your bills on time? And if not, how late were you, when were you late, and how often?

-30% of the score comes from amounts owed: how much do you owe on each account, and how much of your credit limit have you used? This last measure, called debt utilization ratio, refers to the percentage of available borrowing power you have actually used vs. what you have. In other words, if you have $100,000.00 in available credit card limits but have only borrowed $5,000, your credit utilization ratio would be very, very good: 5%. However, if you had borrowed $85,000, your credit utilization ratio would be very, very bad: 85%. This is a very important factor in all credit scoring.

-15% of the score derives from credit history: how long have you had each account?

-10% of the score derives from the types of credit you maintain, i.e. revolving debt (credit card debt) gives you less credit on your credit score than mortgage debt.

-10% of the score comes from applying for, or opening, new credit accounts. The FICO scoring model penalizes you for shopping for new credit or for opening up new credit accounts.

The Newly-Released "Damage Points" Information from FICO

Not surprisingly, FICO employs a method called "damage points" to downgrade credit scores depending on the type of negative credit information. So, as I have been saying for some time, for people with average-to-excellent credit, FICO scoring (and, most likely, the scoring models which the credit bureaus themselves will be releasing and promoting in the coming months and years) is akin to scoring an Olympic dancing or diving contest: the judges can sometimes look for picayune stuff to seriously downgrade one's score. FICO scoring begins to look more like "American Idol" every day.

Jeremy Simon, a contributing writer for Yahoo! Finance, describes this "American Idol" effect in his recent article on FICO "damage points":

"Those with good or excellent credit-so-called prime borrowers-put more points at risk with each (credit) mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score-780-that same delinquency can send a FICO score tumbling by 90 to 100 points."

Fair Isaac provided the following chart of "damage points" in its news release:

Credit Mistake - If Your Score is 680 - If Your Score is 780

Maxed-out card - Down 10 to 30 pts. - Down 25 to 45 points.

30-day late payment - Down 60 to 80 pts. - Down 90 to 110 pts.

Debt Settlement - Down 45 to 65 pts. - Down 105 to 125 pts.

Foreclosure - Down 85 to 105 pts. - Down 140 to 160 pts.

Bankruptcy - Down 130 to 150 pts. - Down 220 to 240 pts.

One wonders why FICO is so eager to penalize prime borrowers disproportionally. The answer is relatively simple when one understands that FICO remains true to its clientele-big banks, big mortgage companies, big credit card companies, major credit bureaus-who in turn have every incentive to put the fear of god into their best borrowers to ensure repayment. In turn, better-risk borrowers create higher-value debt instruments which are then bundled and packaged into new investment vehicles. This is called "securitization" and is one of the elements of the "mortgage meltdown" of 2007 and 2008, when low-grade mortgage debt was packaged and sold as high-grade mortgage debt.

Why Do "Damage Points" Cause Disproportional Damage to Consumers with Higher Scores?

To fully understand credit scoring, it is important to understand that the consumer is only seeing the first half of the picture: the retail transaction in which the consumer's credit is being considered to determine if he is a worthy credit risk. That's the "front door" of credit scoring. The "back door" is the fact that investment banks rely on unnecessarily harsh and unfairly punitive credit scoring to select out the best loans which will then be bundled and securitized so that investment bankers can continue to make seven- and eight-figure incomes while the rest of us toil in the fields.

At the end of the day, FICO serves its masters at the large investment banks; individual consumers are pawns in the overall scheme, which is why credit scoring is flatly unfair to many credit-worthy consumers.

Is It Really Important to Get a Score Above 800?

I meet a lot of consumers who carry over their "grades-obsession" from high school into a "credit-score obsession" as adults. My overall advise: it's really a blind obsession, and you start getting the best credit offers at about credit score 730 or 740. Beyond that, it's an ego thing and it probably is not necessary. Banks do not present you with a different-colored diploma if you manage to get your credit score above 800. Any time spent getting a credit score better than about 750 is time wasted.

Further, past a point no one really knows why one person has an 800-plus score and another has a score between 750 and 800. As with any mathematical process, there are invariably "fudge points" one way or another which ultimately have no bearing on whether you will get the best credit offers when you apply for credit.

That said, here are a few time-honored techniques to getting your score into the 700's or above:

1.Pay your bills on time.

2.Keep your credit utilization ratio low, ideally below 10%. Credit utilization ratio refers to your available credit vs. how much of your credit you have used. If you have available credit of $100,000.00 and you have only used $5,000.00, your credit utilization ratio is 5%, which is excellent. On the other hand, if you have used $85,000.00 of your $100,000.00 available credit, this is a credit utilization ratio of 85% and is poor. A high credit utilization ratio will have a certain negative impact upon your credit score even if you do not have any late payments.

3.Have types of credit other than credit cards. Look around: everyone can get at least some kind of credit card these days. Having a current mortgage or a current car loan will improve your score. Mortgage debt is usually considered the best possible type of credit for a good credit score.

4.Keep your old accounts open, even if you do not carry a balance on them, and shy away from opening new credit accounts unless you have to do so. One factor in credit scoring is length of credit history. Some of my friends like to close out cards whenever they can transfer balances to new cards with promotional zero percent interest rates, and will repeat this cycle for as long as they can continue it. It's a bad practice: the credit inquiries from any new credit applications alone will cause your score to drop. Opening up new lines of credit with balances can negatively affect your credit utilization ratio. Closing out older lines of credit-particularly ones with a good payment history-will deprive you of the positive influence of these credit items. The better practice is simply to pay down and pay off older credit cards, and then just keep them locked in the desk drawer for a rainy day.

5.Avoid the other types of activities that can result in derogatory credit reporting: bankruptcies, foreclosures, repossessions are the best known ones, but these days debt collectors are reporting "debt settlements" as derogatories on credit reports. As seen in the chart above, these can have a major negative impact on your credit score.

I hope this article answers some of your questions about credit scoring.



Reference to http://malawfirm.info/130222-Secrets-of-FICO-Credit-Scoring-Revealed-Finally.html

PROLIANT

Another good link with lots of PDF's.

http://qfrmc.imaa.ic.ac.uk/qfrmc/conference/programme.php?section=prog