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									Credit Scoring


 Beyond the Numbers
Presenter


David Nemeth Credit Manager for Key Education Resources
       Goals of Presentation


Improve your understanding of credit scoring
      Historical perspective
      Calculation
      Types
      Usage
Demonstrate validity of credit score utilization
Increase awareness for the need to manage
 your credit
Provide resources to manage your credit
Facts and Myths of Credit
         Scoring
                 Take the test
                    True of False ?

1.   Closing accounts will increase your CB score
2.   Checking your own score will decrease your CB Score
3.   Credit Counseling will decrease your CB score
4.   Paying all of your debts on time will ensure you have
     have a good CB score
5.   Lenders look at more than 1 score to evaluate
     borrowers

                  GROUP SCORE: ??
History of Credit Scoring:
   Subjective Lending
               Lenders relied on
               subjective factors
               to make decisions
               Intuitive Measures
               Results were slow,
               inconsistent and
               unreliable
  History of Credit Scoring:
       Point Systems
Item               Pts   Standardization
Income             1     and point
Employed           1     system arose to
References         1
                         eliminate human
Debt Ratio < 40%   1
                         bias, but were
$10K on deposit    1
                         still tied to
Total              5
                         intuitive
                         measures
History of Credit Scoring:
Predictive Scoring Models
Credit scoring was
invented in the 1950s
by Fair, Isaac Inc.
In mid 1980s, credit
granting took a giant
leap forward when
statistical models
were built that
considered numerous
variables and
combinations of
variables.
What Is Credit Scoring ?

Credit Scoring is a system used to
facilitate decision making.
Method of converting large amounts of
difficult to compare data into a single
point score that facilitates comparison
Process of analyzing past performance
trends to predict future performance
How Is a Credit Scoring
  Model Developed
Analysis of a large set of
consumers (>= 1 Million)
Identification of common variables
that define behavior
Statistical models are then built that
assign weights to each variable
Adding all variables combines to
make an individual score
Types of Credit Scoring

Classic FICO
Equifax Bankruptcy Navigator Index
Experian: Scorex Plus
NextGen FICO
Industry Specific Risk Models (auto,
   credit card)
Custom credit scoring
Alternative Credit Scoring

 MarketMax (Equifax)
 Crossview (Experian)
Scoring Model Example
         FICO
Classic FICO Score
   Developed by Fair, Isaac Inc.
   All 3 major credit reporting
    agencies utilize score
      Beacon         Equifax
      Fico Classic   TransUnion
      Experian       Experian
   Score range between 300 – 850
   Median = 723
      Fair Isaac Timeline

1956 – FairIsaac founded by Bill Fair & Earl Isaac
1958 – Markets to Top 50 lenders to initiate Credit Scoring- 1
       Replies
1958 – 1st Credit Scoring System created for American
       Investments
1981 – 1st Fair Isaac Credit Bureau risk score introduced
1989 – 1st general purpose FICO score debuts- Beacon @
                 Equifax
1991 – FICO credit bureau scores made available to all 3 credit
       bureau agencies
2001 – NextGen FICO scores made available to all 3 credit
                 bureau agencies
2003 – MyFICO service becomes 1st service offering consumers
                 FICO scores
2004 – Launch of Global FICO score for worldwide markets
What Is Your FICO Credit
         Score?
Forecast of how well you will repay a
loan as agreed during the next 24 months
– the higher the score, the better the
forecast that you will repay
Snapshot of your credit history at a
particular point in time
Only includes factors related to an
individual’s credit
Always changing
What FICO Credit Scoring
        is Not

Race, color, religion, national origin, sex
or marital status
Your age
Your employment information
Where you live
Non-credit inquiries
Any information not found in your credit
             FICO Credit Score
                Components
     Level of new                   Types of Credit
     Credit                         In Use




History of            CB Score             Amount
Payments                                   Owed




               Length of Credit History
 FICO Credit Score
Component Weighting
 Credit Statistics:
National Averages
FICO Credit Scoring Top 10
        Factors
 Serious delinquency    Number of accounts
 Serious delinquency    with delinquency
 and public record      Amount owed on
                        accounts
 Derogatory public
                        Balances to credit
 record                 limits on revolving
 Time since             accounts too high
 delinquency is too     Length of time
 recent                 accounts have been
 Level of delinquency   established
 on accounts            Too many accounts
                        with Balances
National Distribution of
     FICO Scores
Why Use Credit Scoring?

Speed
Consistency
Objective
Cost Effective
Reliability
Strong Analytical Support
Support increased lending
> 70% of Top 100 largest financial
institutions use score to make billions of
credit decisions annually
Reliability of FICO Scoring
         Validation Graph
Validation of Major FICO
     Score Ranges
Credit Scoring Utilization in
    Education Industry
Credit Scoring is a system used to facilitate
  decision making.

  Lending decision         Credit
  Servicing decision       Forbearance
  Collection decision      Levels
  Marketing decision       Pre-approvals
Why You Want to Manage
     Your Credit
Because it is widely used to make
 decisions about you:

 Lenders
 Landlords
 Insurance
 Employers
 Government Licensing
What do you get out of it?

                                 Easier Access to
                                 credit
                                 Lower rates
                                 Savings




A 30 point average score increase nationwide would translate
into a $16 billion savings in credit card finance charges alone.
   Managing Your Credit
      Fixing Errors
1. Contact All 3 Credit Reporting
   Agencies
2. Contact the Creditor in Question
3. Follow-up
    Managing Your Credit
    Fixing Errors – Cont.
Document discrepancies in letter to the
credit agency detailing:
   Name, address, SSN
   Account and account #’s disputing
   The information you are disputing and why
   Any documentation to support your claim
   A request for an updated credit report
    reflecting the correct information
Getting Your Credit Report

 2003 Fair and Accurate Credit
 Transactions Act (FACT ACT)
 Annual Credit Report.COM
 (877) FACTACT
 Must provide free if denied
 credit within 60 days
 Review for accuracy annually
 Dispute incorrect information
    Resources for Credit
  Bureaus and FICO Scores
CBI/Equifax       Experian           TransUnion Corp
1(800)685-1111    1(888)397-3742     1(800)888-4213
www.equifax.com   www.experian.com   www.transunion.com



MYFICO.COM                           ANNUALCREDIT
                                     REPORT.COM
        What Is on the
        Credit Report
Personal Information
    Names, current & previous addresses, employers,
    DOB and spouse’s name
Credit Information
    Credit granted and history & timeliness of
    repayment, revolving, installment or open ended,
    payment patterns for past 7 years
Public Record Information
    Records found on public documents: bankruptcies,
    tax liens, collection accounts, overdue child
    support
Inquiries
    List of creditors and agencies who have requested
    your credit report
Credit Bureau Example


 Equifax Credit Bureau
     FICO CB Score: Beacon
       Major factors
     Negative Tradelines
     Public Records
     Debt
     Score
Credit Scores & Mortgage
Rates: Massachusetts
Credit Scores & Mortgage
Rates: New Jersey
     Credit Summary



Pay bills on time
Manage your debt load appropriately
Review your credit
Repeat
Questions

								
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