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Home: Credit History 101
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History of credit scores
Credit scores became widely used in the 1980's. Long before credit scores, human judgment was the sole factor in deciding who received credit. Lenders used their past experience at observing consumer credit behavior as the basis for judging new consumers. Not only was this a slow process, but it was also unreliable because of human error. Lenders eventually began to standardize how they made credit decisions by using a point system that scored the different variables on a consumer's credit report. This point system helped to eliminate much of the bias that previously existed; however, it was still tied to intuitive measures of credit worthiness and was not based on actual consumer behavior. Credit granting took a huge leap forward when statistical models were built that considered numerous variables and combinations of variables. |
These models were built using payment information from thousands of actual consumers, which made scores highly effective in predicting consumer credit behavior. When combined with computer applications, scoring models have made the credit granting process extremely fast, efficient and objective, facilitating commerce and helping consumers quickly get the credit they need.
The credit modeling process
Designers of credit scoring models review a set of consumers - often over a million - who opened loans at the same time, and determine who paid their loan and who did not. The credit profiles of the consumers who defaulted on the loans are examined to identify common variables they exhibited at the time they applied for the loan. The designers then build statistical models that assign weights to each variable, and these variables are combined to create a credit score. Models for specific types of loans, such as auto or home, more closely consider consumer payment statistics related to these loans. Model builders strive to identify the best set of variables from a consumer's past credit history that most effectively predict future credit behavior.
Risk categories
In determining credit scores, lenders place you in a risk category that compares you to a large number of consumers with similar credit histories. This allows lenders to compare "apples to apples," ensuring that your credit behavior is judged in a context that is relevant and fair. For example, consumers with brief credit histories and only a few accounts are not compared to consumers with long-established credit histories. Rather, these consumers will be compared to other consumers who also have brief credit histories. Keep in mind that the attributes of your risk category (i.e. number of accounts, total debt, etc.) may not have the same impact to a credit score for consumers in another risk category.
What are score factors?
Score factors are the elements from your credit report that drive your credit score. For example, such elements as your total debt, types of accounts, number of late payments and age of accounts are what determine the outcome of your credit score. Score factors can have a positive or negative affect on your credit score. Lenders must provide consumers with the most significant score factors when they are declined credit.
Your credit score
How can I see my credit score?
Lenders, especially mortgage lenders, often make credit scores available to consumers during the loan process, although they are under no obligation to do so. However, there is a good possibility that consumers will soon have the benefit of new disclosure laws concerning credit scores. For example, the state of California recently passed a law that will obligate mortgage lenders to reveal credit scores to loan applicants beginning in July 2001. Industry analysts expect other states to follow suit. |
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Why don't I have a credit score? Credit scoring models cannot generate a score without sufficient credit information. If you have little or no credit history, you will probably not have a credit score available. If you have never had a credit account, try applying for a retail, gas or secured credit card to begin your credit history. Keep your outstanding debt low and pay your bills on time. Before long you will be receiving additional offers for credit. However, be cautious to only apply for credit that you really need.
How do I improve my credit score?
Paying your bills on time is the single most important contributor to a good credit score. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you should minimize outstanding debt, avoid overextending yourself and applying for credit needlessly. Applications for credit show up as inquiries on your credit report, indicating to lenders that you may be taking on new debt. Use the credit you already have to prove your ongoing ability to manage credit responsibly. If you do have negative information on your credit report, such as late payments, a bankruptcy, public record item or too many inquiries, your best strategy is to pay your bills and wait. Time is often your best ally in improving credit.
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Managing score factors
If you are declined credit, a lender must notify you of the top reasons why. Pay careful attention to these factors and manage your credit accordingly. For example, if you have been declined credit because of high outstanding balances, chances are other lenders will feel the same way.
How often does my credit score change?
Your credit score is a fluid number that changes as your credit report changes. Therefore, any change to your credit report could impact your score. |
How do my spouse or other family members affect my credit?
If you hold a joint credit account, have co-signed a loan or have authorized use of another person's credit, these items could affect your score if they appear on your credit report. It's important that joint account holders or authorized users understand that their credit behavior does affect the other joint account holder or main account holder. A credit account held solely in the name of your spouse, child or any other family member cannot impact your credit score. However, in community property states, all debt acquired during a marriage is considered a joint debt, regardless if the account is joint or in the name of an individual spouse.
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