Credit scoring helps creditors determine the credibility of borrowers and the likelihood of loan default. Around 70% of the leading mortgage and financial lending institutions in America rely on credit report scores to make decisions regarding credit.
Fair Isaac Inc. was the first company to introduce the FICO model of credit scoring in 1989 and subsequently made available its software to the 3 major credit bureaus (Experian, Transunion and Equifax). However, it was in 1995 that Freddie Mac and Fannie Mae, two renowned mortgage underwriters, gave these credit scores the green signal and popularized their usage.
Does credit scoring work? Well, this is a question that has provoked a fair share of arguments and debate. While some creditors have adopted the classic FICO scoring model, others have developed their own versions of the standard FICO model. These variations are designed to fit requirements of a particular kind of credit like auto loans, credit cards, mo rtgages, installment loans etc. However, even though credit scoring is indispensable to some creditors, its accuracy and validity has been questioned time and again.
In 2002, a study was conducted by the National Credit Reporting Association as an effort to evaluate credit scoring reliability in judging consumer credit behavior. The findings mentioned that there was a surprising lack of reviews from sources outside the industry. Even more surprising was that no evaluations were permitted by scholars. Even government regulators did not attempt to ascertain whether the method to arrive at credit report scores was non-discriminatory and precise. The study also discovered that the way in which the information in the credit report manifested into credit scores was a well preserved secret. This secrecy and discretion was confined not only to the consumers but was extended to the creditors as well.
But Fair Isaac Inc. is firm in the conviction that its FICO credit score s are valuable to creditors to determine the likelihood of repayment and to borrowers for rate-shopping. Fair Isaac also points out that this scoring method has been tested over a period of time by a large number of creditors and has proved to be invaluable when it comes to judging borrower consistency and credibility. Through a model developed using statistical techniques, it shows how the largest percentage of delinquency is found among the section having a score of less than 475 and how it drops proportionately in accordance with a 25-30 points rise in scores.
Fair Isaac also states that its credit scores are arrived at according to the information present in the credit report. So, a close examination of the credit bureau reports can serve to mitigate the secrecy around credit report scores. Credit scoring must work at least to a considerable extent or it would not be used by thousands of creditors to make important credit decisions.
P Neely writes about starting a handyman business, including how to decide if you should become a handyman.
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