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Credit Report Score Model: The Credit Scoring Game |
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The terms FICO score or Credit report score are very commonly used in the arena of loans especially home mortgages. Every lender has to assess how great a risk is the borrower and for that he uses Credit Scoring, which is a means of applying a sophisticated mathematical model to your credit report score, and the behavior of other borrowers like you. Of the many companies employing scoring models, Fair, Isaacs is the most famous, but it has always maintained a veil of secrecy on its system. In general terms, they base their assessment of how likely you are to pay your bills on time on your credit history, income, outstanding debt and debt use over the years, access to credit report score, and other indicators of your financial behavior. The credit report score is then converted into a number which ranges from 300 to 850. The lower end indicates poor credit and therefore high risk. This number then enables the lender to assess whether the loan should be given or not. A credit report score of 620 is considered as a cut-off point for loans and you're usually off into the private sub-prime market, where rates are higher. When you have received the credit report score, what is the need to worry any more? Normally the rates, fees and terms of a loan are fixed by a lender in relation to the risk factor associated with the borrower. However, it does not exactly work in this way, at least not that precisely. Below the 620 line, several grades of credit have been fixed (A-, B, C, D), whereas above the 620 line of credit report score, the charges are more or less the same for everyone. The conclusion is that you can be penalized by the lenders for poorly managed credit but there are no rewards for effective and wise management of debt. It is true that people have not been asking for this sort of a number and as such what is the need to evaluate the credit report score for each loan? Previously, mortgages were clubbed together for sale and these pools were made up of a range of credit risks. All these risks were good, but some were better than others and some worse than others. Accordingly, some borrowers were likely to pay their loans early and others were not likely to make their payments at all! To add or remove risk (and rewards) to a bigger investment portfolio, investors try to separate various portfolios of mortgage loans. A higher level of performance can be guaranteed if the risks are known. Investors desire to have a greater level of precision for which they are willing to pay more and insist that the industry should endeavor to achieve the same. The credit report score is a result of this and as such sellers can now club together a package of loans containing specific types of borrowers, all with similar credit report scores, instead of a wide muddy pool of credit risks where each one is quite distant from the others. It has been found that credit scoring is a good tool to evaluate your credit report score both on paper and in practice, too. Without this credit scoring system, the sub-prime lending industry could not have been developed. There has been a spurt in the availability of credit to some borrowers and more and more competitors are vying with each other to obtain their business by offering lower rates and more choices in the products. It would not be wrong to say that thousands of homeowners have had a chance to get a mortgage mainly because of credit scoring. It is no longer difficult to know your credit report score as you should certainly ask for it especially before you apply for a mortgage. FICO has indicated that it will certainly provide you with the number as part of a financial transaction. |
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