Credit Score: A Scoring System For Loan Qualification
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Bjornson Bernales
By Bjornson Bernales
Published on 12/18/2007
Aside from credit history,
financial institutions rely on the credit score of an individual in their
decision to extend a loan.
Aside from credit history,
financial institutions rely on the credit score of an individual in their
decision to extend a loan. Credit Score: A Scoring System For Loan Qualification
One of the many factors that lenders use to determine a borrower's creditworthiness is the credit score.
Credit score is a form of credit rating used by many lending institutions to check the worthiness of a borrower. It is in the form of numerical expression which may fluctuate in accordance to the borrower's credit files. The determination of the score is based on the statistical analysis of an individual's financial information most particularly the credit files.
Credit bureaus are the sources of the credit report information. The credit report is a compilation of financial records of an individual. It includes the different information on transactions which might have significance to the decision of a lender in the extension of a loan to a certain borrower. The data on the report are obtained from different data furnishers which are different organizations that the borrower has transacted with including those that have the borrower's profile.
Credit score has been widely used by banks, lending institutions and credit card companies to determine the worthiness of a borrower for a loan grant. It is also used to determine the likelihood of a person's character to pay obligations in a timely manner.
The use of credit score to determine the creditworthiness of an individual is not only limited to financial institutions. Other organizations such as insurance companies, mobile phone companies, government departments, employers and other retail marketers that sell products on credit, may also use the same technique in determining the credit integrity of an individual.
Credit score may have certain effects on different kinds of borrowers. It plays an important part in securing a mortgage loan or a credit card. For lenders, the credit score is a factor in determining the credit risk. It may draw an inference to the probability of the borrower to default on payment. Borrowers with higher credit score are less likely to make default on payment while those that have lower credit scores may not be able to secure a loan. But if ever a lender extends a loan to high-risk borrowers with lower credit scores, the loan may be expensive because of the high interest rate.
Credit score is used primarily by lenders in their decision in extending a type of loan to a certain borrower. Aside from that, other financial firms also use it in setting a credit limit particularly in credit card application.
Also, credit score has been used in determining the credit behavior of an individual based on the number of factors. These factors include: the payment history of the borrower as well as the amounts owed, length of credit history, new credit and the types of credit used. These factors may have been used in the calculation of the credit score.
The scoring of the credit information of an individual may differ in every country as well the kind of scoring method used in a lending institution. In the United States, the most popular credit scoring used is the FICO score.
The FICO score is the most widely used credit scoring system of major credit bureaus and lending organizations in the United States. The scoring system is a registered trademark of Fair Isaac Corporation, a publicly-listed corporation providing consulting services and management advisory systems.
FICO score is available in major credit reporting agencies in the United States: TransUnion, Experian and Equifax. In Canada, the scoring system is available in the same organizations. The mentioned credit bureaus also use FICO alternatives such as PLUS score of Experian, Credit Score of TransUnion and ScorePower of Equifax.
The statistical models for credit score generation used by the different lending organizations and credit reporting agencies are subject to federal regulation.
Credit score can have great significance to a borrower particularly in their loan qualification and credit integrity.
Individual borrowers should practice wise financial decision to possibly attain a higher credit score. However, credit score may fluctuate depending on the credit history and from a lot of factors. It may be important to seek for a financial consultant on the ways to possibly attain a higher credit score and to be able to qualify for a low-interest rate loan.
Credit score is a form of credit rating used by many lending institutions to check the worthiness of a borrower. It is in the form of numerical expression which may fluctuate in accordance to the borrower's credit files. The determination of the score is based on the statistical analysis of an individual's financial information most particularly the credit files.
Credit bureaus are the sources of the credit report information. The credit report is a compilation of financial records of an individual. It includes the different information on transactions which might have significance to the decision of a lender in the extension of a loan to a certain borrower. The data on the report are obtained from different data furnishers which are different organizations that the borrower has transacted with including those that have the borrower's profile.
Credit score has been widely used by banks, lending institutions and credit card companies to determine the worthiness of a borrower for a loan grant. It is also used to determine the likelihood of a person's character to pay obligations in a timely manner.
The use of credit score to determine the creditworthiness of an individual is not only limited to financial institutions. Other organizations such as insurance companies, mobile phone companies, government departments, employers and other retail marketers that sell products on credit, may also use the same technique in determining the credit integrity of an individual.
Credit score may have certain effects on different kinds of borrowers. It plays an important part in securing a mortgage loan or a credit card. For lenders, the credit score is a factor in determining the credit risk. It may draw an inference to the probability of the borrower to default on payment. Borrowers with higher credit score are less likely to make default on payment while those that have lower credit scores may not be able to secure a loan. But if ever a lender extends a loan to high-risk borrowers with lower credit scores, the loan may be expensive because of the high interest rate.
Credit score is used primarily by lenders in their decision in extending a type of loan to a certain borrower. Aside from that, other financial firms also use it in setting a credit limit particularly in credit card application.
Also, credit score has been used in determining the credit behavior of an individual based on the number of factors. These factors include: the payment history of the borrower as well as the amounts owed, length of credit history, new credit and the types of credit used. These factors may have been used in the calculation of the credit score.
The scoring of the credit information of an individual may differ in every country as well the kind of scoring method used in a lending institution. In the United States, the most popular credit scoring used is the FICO score.
The FICO score is the most widely used credit scoring system of major credit bureaus and lending organizations in the United States. The scoring system is a registered trademark of Fair Isaac Corporation, a publicly-listed corporation providing consulting services and management advisory systems.
FICO score is available in major credit reporting agencies in the United States: TransUnion, Experian and Equifax. In Canada, the scoring system is available in the same organizations. The mentioned credit bureaus also use FICO alternatives such as PLUS score of Experian, Credit Score of TransUnion and ScorePower of Equifax.
The statistical models for credit score generation used by the different lending organizations and credit reporting agencies are subject to federal regulation.
Credit score can have great significance to a borrower particularly in their loan qualification and credit integrity.
Individual borrowers should practice wise financial decision to possibly attain a higher credit score. However, credit score may fluctuate depending on the credit history and from a lot of factors. It may be important to seek for a financial consultant on the ways to possibly attain a higher credit score and to be able to qualify for a low-interest rate loan.