What Is Credit Scoring?

There are 3 credit reporting bureaus that most lenders use:

Trans Union.
Equifax.
Experian.

All of which are privately held and operated.

NOTE - NOT ALL LENDERS UTILIZE CREDIT SCORES FOR QUALIFYING PURPOSES.

The use of a statistical model to objectively evaluate all the credit information available in a single repository (Bureau).

Bureau scores - sometimes referred to as FICO scores, are calculated by a system of scorecards, developed for each repository.

The scoring models reside with in the software of the 3 credit repositories and are called:

Beacon - at Equifax
Emperica - at Trans Union
FICO - at Experian

In developing these score cards, Fair Isaac, uses credit data on millions of consumers, and applies complex mathematical methods to perform extensive research into credit patterns that forecast repayment performance.

Through this process Fair Isaac identifies distinctive credit patterns. Each pattern corresponds to a likelihood that a consumer will make his or her loan payments as agreed in the future.

Fair Isaac observed a very large number of credit histories of mortgage borrowers to determine which credit report items or a combination of these items are the most predictive of risk.

Any information not present in a repository credit file is not used by the scoring model in creating a Credit Bureau score.

Understanding Credit Scoring

Credit scores are used by creditors to determine the risk in giving loans or credit to applicants. It's derivative value to lenders is a universal approach in telling them how likely an individual is to repay a loan or to make timely payments. Again, the credit score is based on a model and equation derived from analysis of the credit history of millions of people. Based on the collective credit history and research of study groups and different credit profiles, the credit scored estimates future behavior in respect to repayment of loans, making timely payments, and propensity of individuals with similar current financial statuses to default or declare bankruptcy in the future. What credit scoring does not take into consideration an individuals ethnic group, religion, gender, marital status and nationality. These are, in fact, prohibited from use in scoring by US law. The importance of any factor depends on the overall information in the credit report.