Credit Scores Analysed
How do credit bureaux compute credit scores?
Most of the credit reporting bureaux or agencies gather information on the subject of the debtor’s credit history or files from reliable private and public sources. They also collect data from the creditors who extended the loan to the debtor.
The data is then clustered into five sets or categories and percentage weightings are allocated which reflect the importance of each category to the final scoring, namely: (i) Owed Amount – 30%, (ii) History of Payments – 30%, (iii) Duration of Credit Record – 15%, (iv) Category of Credit Currently in Use – 10%, and lastly (v) Most recent Credit Inquiries – 10%.
The higher the credit score, the better chance of acquiring low interest rates for the loan being applied for getting a better deal. Generally, these credit bureaux calculate the debtor’s credit score using a three figure number which range from 300 up to 850.
The industry of credit-scoring has been generating different opinions and wide-spread reactions to the public. The consumers fear that credit-based rating or scoring will pose a negative impact or unjust rating to them and will affect their economic standing and other financial transactions.
Some credit bureaux justify their purpose as one of simply gathering information and calculating a credit score or rating. For them, their work is purely one of helping lending businesses formulate efficient economic decisions.
Others create a distinction between the credit-based scores of insurance companies which predicts the loss of propensity and the credit scores which are simply to predict the worthiness of a certain person to pay.
A distinctive company should develop its own credit-base rating or scoring algorithm to serve better the consumers. Here are some of the strategies adopted in credit scoring:
1. Forming a Credit Assistance Group/Team – they are the quick response group that will assist consumers calling through toll-free numbers. The public would certainly like to know the effect of credit records to their application of loans, mortgage, employment and/or insurance transactions.
Also included to the team’s responsibility is the making of reports on the personal credit insurance of the consumers. This report will show the consumer’s variable score and the comparison with the aggregate scores
In addition, the team will consider previous credit records and the possible effect of
extraordinary events which resulted to low scoring.
They will help the consumers by directing or referring them to the right people who will be of much help to them in taking good care of their credit problems. They will also help in correcting errors in the credit records of the concerned consumer.
2. Revising a New Method in Credit Scoring- this simplified method uses nine variables instead of the usual sixteen. Their algorithm will compute the credit scores by designating or assigning 100 as a foundation score. From these base score, they either add or minus making the range of score from 50 up to 250. The lower the score, the more desirable it is as credit scores.
3. For those consumers with no credit records or whose credit histories are lacking, they will create a program which will specifically cater to these groups of creditors to somehow uplift their credit ratings.
With the continued research and study on the needs of the consumers, these credit scoring bureaus will truly make a difference to the lending and/or insurance world. |
