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Credit Report: Using Credit Records To Evaluate Creditworthiness |
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In developing credit report scores, builders of credit scoring models consider a wide variety of summary factors drawn from credit records. In most cases, the factors are constructed by combining information from different items within an individual's credit record. These factors compose the key elements of credit models used to generate credit report scores. Although hundreds of factors may be created from credit records, those used in credit-scoring models are the ones proven statistically to be the most valid predictors of future credit performance. The factors and the weights assigned to each one can vary across evaluators and their different models, but the factors generally fall into four broad areas: payment history, consumer indebtedness, length of credit history, and the acquisition of new credit. Let's discuss these factors in detail- Payment History The most important factors considered in credit evaluation are those that relate to an individual's credit history of repaying loans and any evidence of noncredit-related collections or money-related public actions. They can get information about a person's credit history from his or her credit report. Credit evaluators consider whether an individual has a history of repaying balances on credit accounts on time. The analysis takes into account not only the frequency of any repayment problems, but also their severity (lateness) date of occurrence (newness), and dollar magnitude. Evaluators assess repayment performance on the full range of accounts that an individual holds, distinguishing accounts by type (such as revolving, installment or mortgage) and by getting their credit report. In general, an individual with serious deficiencies in repayment performance, such as a credit account that is currently delinquent, will find qualifying for a new credit difficult, may face higher interest rates for the credit received, or may be limited in further borrowing on existing revolving accounts. Consumer Indebtedness When evaluating a credit report, creditors consider the type and amount of debt an individual has and the rate of credit utilization. For revolving accounts, the rate of credit utilization is measured as the proportion of available credit in use (outstanding balance divided by the maximum amount the individual is authorized to borrow, referred to as the credit limit). For installment and mortgage accounts, credit utilization is generally measured as the proportion of the original loan amount that is unpaid. High rates of credit utilization are generally viewed as an additional risk factor in credit evaluations, as they may indicate that an individual has tapped all available credit to deal with a financial setback, such as a loss of income. Length of Credit History Credit evaluators consider the length of a person's credit history because it provides information about how long the individual has been involved in credit markets and whether he has obtained credit recently. Age of the account is relevant to an evaluation of credit quality because the longer the account has been open, the more information it conveys about an individual's willingness and ability to make payments as scheduled. New accounts may convey little information other than that a consumer has had a recent need for additional credit and has been approved for credit. Credit evaluators get all this information from credit their credit reports. They can pull out an individual's credit report from three major credit reporting agencies: Equifax, TransUnion, and Experian. Acquisition of New Credit The number of new accounts the individual has recently established and the number of attempts to obtain additional loans, as conveyed by records of recent creditor inquiries (requests for credit reports), all provide a picture of the individual's recent credit profile. Attempts to open a relatively large number of new accounts may signal that a person risks becoming overextended. So, these are the factors that are considered by credit evaluators to assess your creditworthiness. Credit evaluators evaluate your creditworthiness of repaying the loans by getting your credit report. So, if you want to get credit, the first step is to get your credit report from the three credit reporting agencies mentioned above. Having a good credit report is the key to your financial future. If you have never seen your own credit report, why not take the step now and get a copy? |
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