EPIC

Introduction

A credit score is a number, generally between 300-850, assigned to you to rate how risky a borrower you are–the higher the score, the less risk you pose to creditors.

Your credit score plays a vital role when lenders decide whether to extend you credit. According to Fair Isaac Company, over 75 percent of mortgage lenders and over 90 percent of credit card lenders use credit scores when making their lending decisions. A low credit score may result in a denial of credit. Furthermore, lenders will charge higher interest rates on loans to individuals with lower scores. This practice is known as risk-based pricing.

In addition, your credit score is used in decisions beyond lending matters. Employers, utility service providers, among many others, use credit scores to evaluate whether to offer their services to individuals, and uses for the credit score continue to expand. Perhaps the most troublesome recent use of the credit score is by insurance companies to establish rates. In short, the decisions relating to whether you receive even the most basic services comes down to this single number.

Equifax, Experian, and Trans Union dominate the credit reporting business. These three agencies use three different models for credit scoring. Fair, Isaac and Company develops scoring models for Equifax and Trans Union, which is why they are also called FICO scores. Experian will start to use models developed by Scorex, with whom they merged.

Credit scoring models are developed by analyzing statistics and picking out characteristics that are believed to relate to creditworthiness. Credit Reporting Agencies (CRA) use different scoring models for different purposes. Auto financing, for example, could employ a different model than installment loans. Credit scoring models have long been shrouded in secrecy. Individuals and consumer advocates have found it difficult to ascertain information regarding what factors the models consider, and to what degree. It was only until recently that individuals could even obtain their own score. There is still no general federal legal obligation on CRAs to provide credit scores to individuals. However, some credit services companies now sell the credit score and advice for improving it for a fee.