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Credit Scoring
droiderm
Posts: 778 Forumite
I have been doing a little bit of research about credit scoring lately, and no doubt could do a whole lot more and try and delve a bit deeper into various different aspects. I was actually trying to find an open algorithm, as I am sad like that, but couldn't find one!
Whilst this is not really going to help understand your scores from various CRA's or, why that means a great score may not get you credit from a particular lender, it might help you consider factors which may have had an effect, or at least help you see it from "their side".
I am no expert, my research has primarily came from the internet the text is mostly stolen
Some of the most useful information I can find is based on a scoring system called FICO. (I have no idea who does or doesn't use FICO, or what changes are made to it for any that do).
From their website
This is not to say that all of these institutions use them for credit scoring, but either way I think it's probably still useful to understand how they work, at a high level.
The FICO score breaks down as follows (taken from
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx
)
35% - Payment History
http://www.myfico.com/CreditEducation/Credit-Payment-History.aspx
Public record and collection items
These types of events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts.
Details on late or missed payments ("delinquencies") and public record and collection items
The FICO® Score considers:
Owing money on credit accounts doesn't necessarily mean you're a high-risk borrower with a low FICO® Score. However, when a high percentage of a person's available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.
Part of the science of scoring is determining how much is too much for a given credit profile. Your FICO Score takes into account several factors :
The amount owed on all accounts
Note that even if you pay off your credit cards in full each month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
The amount owed on different types of accounts
In addition to the overall amount you owe, your FICO® Score considers the amount you own on specific types of accounts, such as credit cards and installment loans.
Whether you're showing an amount owed on certain types of accounts
In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. Having a low credit utilization ratio can be better than having a high one, or none at all. For example, closing unused credit accounts that have zero balances and are in good standing will not raise your FICO® Score.
How many accounts have balances
A larger number of accounts with amounts owed can indicate higher risk of over-extension.
How much of the total credit line is being used and other "revolving" credit accounts
Someone who is close to "maxing out" several credit cards has a high credit utilization ratio and may have trouble making payments in the future.
How much of the installment loan amounts is still owed, compared with the original loan amount
For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you still owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you're able and willing to manage and repay debt.
15% - Length of Credit History
How many new accounts you have
Your FICO® Score looks at how many new accounts you have by type of account. It also may look at how many of your accounts are new accounts.
Don't open new accounts too rapidly
If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your FICO® Score if you don’t have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your FICO Score.
How many recent inquiries you have
An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although the FICO® Score only consider inquiries from the last 12 months. The FICO Score has been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.
There are 3 important facts about inquiries to note:
TRUTH: If it does, it probably won't drop much. If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Length of time since credit report inquiries were made
When you shop for credit, inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months.
How long it's been since you opened a new account
Your FICO® Score may consider the time that has passed since you opened a new credit account, for specific types of accounts.
Whether you have a recent good credit history, having bounced back from past payment problems
Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a FICO® Score over time.
10% - New Credit
People tend to have more credit today and shop for new credit more frequently than ever. FICO® Score reflects this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk - especially for people who don't have a long credit history. Your FICO Score takes into account several factors, including how you shop for credit.
10% - Types of Credit Used
Credit mix determines 10% of my FICO Score
The FICO® Score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It's not necessary to have one of each, and it's not a good idea to open credit accounts you don’t intend to use.
The credit mix usually won’t be a key factor in determining your FICO Score—but it will be more important if your credit report does not have a lot of other information on which to base a score.
Have credit cards – but manage them responsibly
Having credit cards and installment loans with a good payment history will raise your FICO Score. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.
What types of credit accounts you have
Do you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?
How many types of credit accounts
Your FICO® Score also looks at the total number of accounts you have. How many is too many will vary depending on your overall credit picture.
Closing an account doesn’t make it go away
A closed account will still show up on your credit report, and its history will be considered by your FICO Score.
However, these weightings are apparently different for different demographics, i.e. people who haven't had a long credit history.
None of this is going to tell you why you may have been turned down for credit by a particular lender, or , why one you have an excellent score from one CRA but you can't get credit.
But it might help you consider factors which will improve your likeliehood of getting credit.
The weightings are the interesting thing for me, and it's probably all stuff I knew anyway (and does tally with what "good" and "bad" indicators some of the CRA's say) , but it helps you see it from the other angle.
Just to be clear, I have no idea which lenders use FICO (or not) but I expect there to be some kind of commonanlity.
One of the other interesting things from my perspective, of what do they actually get from their score. They believe that scores in each range, typically correlate with a percentage chance of defaulting on your payments.
This may be old, but it gives the idea.
Whilst this is not really going to help understand your scores from various CRA's or, why that means a great score may not get you credit from a particular lender, it might help you consider factors which may have had an effect, or at least help you see it from "their side".
I am no expert, my research has primarily came from the internet the text is mostly stolen
Some of the most useful information I can find is based on a scoring system called FICO. (I have no idea who does or doesn't use FICO, or what changes are made to it for any that do).
From their website
FICO clients include:
Nine of the top 10 companies in the Fortune 500
Two-thirds of the top 100 banks in the world
90 of the 100 largest financial institutions in the U.S., and all the 100 largest U.S. credit card issuers
More than 400 personal and commercial lines insurers in North America and Europe, including the top 10 US personal lines insurers
100+ retailers and general merchandisers, including one-third of the top 50 U.S. retailers
150+ healthcare and life sciences companies, including 7 of the world's top 10 pharmaceuticals companies
This is not to say that all of these institutions use them for credit scoring, but either way I think it's probably still useful to understand how they work, at a high level.
The FICO score breaks down as follows (taken from
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx
)
35% - Payment History
http://www.myfico.com/CreditEducation/Credit-Payment-History.aspx
Public record and collection items
These types of events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts.
Details on late or missed payments ("delinquencies") and public record and collection items
The FICO® Score considers:
- How late they were
- How much was owed
- How recently they occurred
- How many there are
Owing money on credit accounts doesn't necessarily mean you're a high-risk borrower with a low FICO® Score. However, when a high percentage of a person's available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.
Part of the science of scoring is determining how much is too much for a given credit profile. Your FICO Score takes into account several factors :
The amount owed on all accounts
Note that even if you pay off your credit cards in full each month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
The amount owed on different types of accounts
In addition to the overall amount you owe, your FICO® Score considers the amount you own on specific types of accounts, such as credit cards and installment loans.
Whether you're showing an amount owed on certain types of accounts
In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. Having a low credit utilization ratio can be better than having a high one, or none at all. For example, closing unused credit accounts that have zero balances and are in good standing will not raise your FICO® Score.
How many accounts have balances
A larger number of accounts with amounts owed can indicate higher risk of over-extension.
How much of the total credit line is being used and other "revolving" credit accounts
Someone who is close to "maxing out" several credit cards has a high credit utilization ratio and may have trouble making payments in the future.
How much of the installment loan amounts is still owed, compared with the original loan amount
For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you still owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you're able and willing to manage and repay debt.
15% - Length of Credit History
How many new accounts you have
Your FICO® Score looks at how many new accounts you have by type of account. It also may look at how many of your accounts are new accounts.
Don't open new accounts too rapidly
If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your FICO® Score if you don’t have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your FICO Score.
How many recent inquiries you have
An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although the FICO® Score only consider inquiries from the last 12 months. The FICO Score has been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.
There are 3 important facts about inquiries to note:
- Inquiries usually have a small impact
- Many types of inquiries are ignored completely
- The score allows for "rate shopping"
TRUTH: If it does, it probably won't drop much. If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Length of time since credit report inquiries were made
When you shop for credit, inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months.
How long it's been since you opened a new account
Your FICO® Score may consider the time that has passed since you opened a new credit account, for specific types of accounts.
Whether you have a recent good credit history, having bounced back from past payment problems
Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a FICO® Score over time.
10% - New Credit
People tend to have more credit today and shop for new credit more frequently than ever. FICO® Score reflects this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk - especially for people who don't have a long credit history. Your FICO Score takes into account several factors, including how you shop for credit.
10% - Types of Credit Used
Credit mix determines 10% of my FICO Score
The FICO® Score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It's not necessary to have one of each, and it's not a good idea to open credit accounts you don’t intend to use.
The credit mix usually won’t be a key factor in determining your FICO Score—but it will be more important if your credit report does not have a lot of other information on which to base a score.
Have credit cards – but manage them responsibly
Having credit cards and installment loans with a good payment history will raise your FICO Score. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.
What types of credit accounts you have
Do you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?
How many types of credit accounts
Your FICO® Score also looks at the total number of accounts you have. How many is too many will vary depending on your overall credit picture.
Closing an account doesn’t make it go away
A closed account will still show up on your credit report, and its history will be considered by your FICO Score.
However, these weightings are apparently different for different demographics, i.e. people who haven't had a long credit history.
None of this is going to tell you why you may have been turned down for credit by a particular lender, or , why one you have an excellent score from one CRA but you can't get credit.
But it might help you consider factors which will improve your likeliehood of getting credit.
The weightings are the interesting thing for me, and it's probably all stuff I knew anyway (and does tally with what "good" and "bad" indicators some of the CRA's say) , but it helps you see it from the other angle.
Just to be clear, I have no idea which lenders use FICO (or not) but I expect there to be some kind of commonanlity.
One of the other interesting things from my perspective, of what do they actually get from their score. They believe that scores in each range, typically correlate with a percentage chance of defaulting on your payments.
This may be old, but it gives the idea.
below 500 have an 83 percent default rate,
500-529 shows a 72 percent delinquency rate
550-599 range there is a 52 percent probability of delinquency, 600-649 scores show a 31 percent delinquency rate,
650-699 have a 15 percent delinquency rate
Over 700 the delinquency rate drops to 5 percent up to 749.
750-799 have a delinquency rate of 2 percent
If your FICO score is 800 or over, you have a 1 percent delinquency likelihood ...
0
Comments
-
It's also 1 year for credit searches to drop off your file not 2.
It's nice you putting this up but the majority of us already know the above information.0 -
FICO is an American system, so irrelevant to UK credit scoring.0
-
BugsyBrowne wrote: »It's also 1 year for credit searches to drop off your file not 2.
It's nice you putting this up but the majority of us already know the above information.
You wouldn't guess so based on the confusion on here on a daily basis....0 -
Deleted_User wrote: »FICO is an American system, so irrelevant to UK credit scoring.
Is that because you think, or you know?
Either way, I found it interesting.0 -
-
Deleted_User wrote: »That would be because I know. Their FICO score is much more important to them than the random numbers we get on this side of the pond.
Maybe you could enlighten us to what the algorithms are the British lenders use?
Seems some of them at least use some FICO products.....
http://www.fico.com/en/firesourceslibrary/coop_bnk_success_2465cs.pdf
http://www.fico.com/en/Company/News/Pages/09-27-2012.aspx
http://brblog.typepad.com/fico_tech_talk_podcast/2009/12/lloyds-leads-uk-card-industry-in-reducing-fraud-with-fico-falcon-fraud-manager.html&sa=U&ei=EkiJUKvAJOqj0QXK94HYBA&ved=0CCcQFjAF&usg=AFQjCNH2Nuw4J6Tql2eAXxDczIURFbL-1g
http://www.fico.com/en/Company/News/Pages/08-25-2011.aspx
I very much doubt any lenders use random number generators. That would be a little silly. If none, some, or all of the UK Lenders us anything based on FICO, or not. I wouldn't expect the theory behind them to be massively different.0 -
Maybe you could enlighten us to what the algorithms are the British lenders use?
No I can't. They each use different mechanisms. Though they appear to share the same approach of starting with a miximum number and subtracting according to negative information.
Which is why you get 18 year olds, with no history and no job getting a 999 score. Which of course, is not exactly what a lender would call a good credit risk.0 -
Deleted_User wrote: »No I can't. They each use different mechanisms. Though they appear to share the same approach of starting with a miximum number and subtracting according to negative information.
Which is why you get 18 year olds, with no history and no job getting a 999 score. Which of course, is not exactly what a lender would call a good credit risk.
Your clearly not talking about a lender .0 -
I do agree with the percentages0
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