Credit scoring

Credit scoring is mathematical modeling used by CREDIT-REPORTING SERVICES to generate a number rating a customer’s credit risk. Fair Isaac and Company (FICO) is the leading provider of credit scores in the United States. Their system generates credit scores, ranging from 300 to 850 for each individual, which are used by lenders to make millions of lending decisions annually. The benefit to most consumers is that credit scores allow lenders to make quick, on-the-spot decisions based on past credit behavior, reducing the potential for bias. But credit scoring is only as good as the data used to create the number and can be a conundrum: How does one get a good credit rating without having access to credit? Critics argue the use of credit scores penalizes poor people, immigrants, and seniors, all groups who tend to pay their bills in cash and therefore do not have credit histories.
Based on past experience, FICO developed a predictive model that is used by the major credit-reporting services.
This model uses
• payment history
• amount owed
• length of credit history
• new credit
• number of CREDIT CARDS
• total available credit
• finance company loans
• bank-issued versus department-store cards
In addition to evaluating consumer LOANS and issuing credit cards, credit scoring is used in making MORTGAGE decisions and determinations for auto- and homeowners-INSURANCE policies. Based on a correlation between credit quality and insurance claims, many insurance companies adjust their rates for potential customers.
Compared to the traditional FIVE CS OF CREDIT, credit scoring introduces less potential for bias and less discretionary judgment.