Credit Score In The United States Of America

 Credit scores in this country are figures that represent the credit worthiness of a person and shows the possibility that the person can repay his debts.

   Lenders like banks and credit card companies use credit scores to analyse the risk of lending money and goods to consumers. They believe that the use of credit scores has made credit available and less expensive to consumers.

   According to the 2010 law on Wallstreet reform Bill, any consumer who is refused a loan, a credit card, or an Insurance coverage because of his credit score, has to be given a free credit score.

1) CREDIT SCORING MODELS

- FICO SCORE

   FICO stands for fair Isaac and company. It was first introduced as a scoring model in 1989. FICO is the main giver of credit cards. FICO credit score model is used by most banks and lenders to determine consumers credit worthiness. The score is based on information about the consumer on his credits from the three main credit bureaus- Experian, Equifax and TransUnion. FICO assembles the credit information since the credit files in the three bureaus can have different information. So some variations can exist depending on the bureau.

2) MAKEUP

   This type of credit scoring model is designed to measure the risk of failure, judging from the consumers financial history. The formula to calculate the scores are secret. The following is what FICO the main credit card company has revealed.

- PAYMENT HISTORY

If it is 35% or more, it is described as lacking derogatory information. But if payment history has derogatory information like bankruptcy, liens,, judgements, settlements, late payments etc. These can cause the FICO score to drop even if the consumer fails to pay just one installment.

- DEBT BURDEN 30%

   Here FICO considers six different metrics, including the debt to limit ratio. It considers the number of bank accounts with balances, how much the consumer owes in the different accounts, it considers the instalmental repayments of loans etc. These percentages are calculated according to the 5 categories of the population. For example, those who have not used credit cards for long, may receive a different consideration.

   Makeup model scoring factors are conditioned by the consumers past and present behaviour on credit repayments.

   Age, employment status, assets and income are not part of the factors of the makeup model. In spite of that, lender still ask for them to make other considerations.

GETTING A HIGHER CREDIT LIMIT

   This can help a credit score. This is because when the credit limit is high, the utilization average ratio will be low for all the credit accounts of the consumer. The utilization ratio is arrived at by dividing the amount owed and the amount limit  or extended. For example, if a person has a credit card and owes 500 dollars and his limit is 1000 dollars, and has another credit card in which he owes 700 dollars and his limit is 2000 dollars. The average is 40%. This is gotten as 500 + 700= 1200 divided by 1000+2000=3000 × 100. This means total owed divided by total Limit multiplied by 100. If the first company raises the credit limit to 2000 dollars the percentage drops to 30%. The lower the FICO rate the better for the makeup model scoring.

   Other factors that can affect the FICO credit score are as follows:
 
- Any money owed because of a court judgement, tax lien, etc have a negative effect on the FICO rating especially if the debt is recent.
 
- Also having one or more credit accounts recently created can play negative in FICO s credit scoring.

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