What is Credit Scoring?

Have you ever wanted to predict the future? Creditors have a way of doing just that.

Credit scoring is a statistically based computerized method for predicting how likely it is that a borrower will pay back a loan before it's even issued. It automates the process of applying for credit, which saves time and increases accuracy. When a car dealership advertises "instant credit approval," that dealership is using credit scoring.

How Does It Work?

Credit reports from millions of borrowers are compared to each other using a computer program that considers similarities between the reports and whether the borrowers paid some or all of their bills on time. The program puts the reports in rank order, giving each a score-like a grade on a test.

Predictive variables are categories for predicting risk. Your credit score is calculated based on these variables. By looking at your credit score, the creditor can figure out how much risk is involved with loaning you money. The score gives the creditor a way to predict how well you will manage your debt.

Changing the Score

No credit score lasts forever. It changes over time as your credit behavior changes. Think of it as a snapshot of your credit performance at one point in time. Your score can go up or down depending on how you manage your credit.

The credit score, which is based entirely on the credit report, is the creditor's most powerful tool for assessing credit risk. To make sure you score high with your credit history, it's important to understand what factors affect your credit score


Understanding credit scoring

 

 

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