Question

How does credit scoring systems works? List factors for predicting credit quality

Answer 1

credit score is a number that third parties, especially lenders, use to assess the risk of lending you money. The score is one way banks, credit card companies and other institutions assess the likelihood that you can or will be able to pay off any debts you accumulate. A higher credit score indicates that your current financial circumstances and your historical behavior demonstrate a willingness and ability to pay off any loans you may be approved for.

In the United States the credit scoring system you will hear about most is the FICO score, a score used by the major credit agencies to rate your creditworthiness. Your FICO score will be between 300 and 850 with a higher score being better. When it comes to your credit, lenders may sometimes refer to it in terms of Credit Level or Credit Quality such as Poor, Fair/Average, Good or Excellent with each category referring to a range of FICO scores.

• Poor credit is considered anyone with a FICO score under 580
• Fair or Fair credit rating will be between 580 and 669
• Good credit is between 670 and 739
• Very Good credit is between 740 and 799
• Excellent credit is anything above 800

How Your Credit Score Impacts Some Financial Products

Your credit score can have an effect in two ways: Whether you can get approved for a financial product in the first place, and what interest rates you may have to pay if you are approved. The higher your FICO score the more likely you are to get approved for a credit card or loan, and will usually reduce the interest rate associated with that particular loan or card. Lower scores may disqualify you for a product or service completely and can raise your interest rates significantly otherwise.

For many credit cards, especially the most lucrative rewards cards, the cards are offered only to consumers that meet a minimum credit quality. Many of the best cards are exclusively marketed to consumers with excellent credit scores. When it comes to credit cards your credit score can determine the breadth of options you can choose from. Most cards are also marketed with a range of interest rates/APRs. The actual interest rate on your specific card will be inversely related to your credit score with higher creditworthiness receiving lower interest rates and vice versa.

With mortgages and auto loans, lenders behave similarly. Your credit score is used as a component whether or not a bank will choose to approve a loan or may force you to make additional concessions for approval. It can and generally will move the interest rate you pay on the loan as well.

Factors for predicting credit score:-

The makeup of your FICO score is broken up into a bunch of major factors: Payment History (35%), Debt Burden (30%), Length of History (15%), Types of Credit(10%), and Recent Credit Searches(10%).