Credit scores are related to the credit history and are provided by the credit bureaus. Mechanism and application of credit scores are very important factors that are related to the lending process.
Credit score reflects a person’s ability to pay back the borrowed amount to the lenders. These scores are prepared on basis of the credit report provided by the credit bureaus. The credit scores are used to evaluate an individual’s creditworthiness that also clarifies the amount of risk involved in the process of providing any type of loan to that individual.Mechanism of Credit Score There are a number of credit bureaus in the United States of America. These agencies collect and compile all relevant credit information about every individual. This information depicts the individuals’ habit of paying back their debts. There are people who pay back debts at time. On the other hand, there are some people who pay earlier then the due date. Some borrowers are very irregular in paying back the debt. All these habits are recorded in the individual credit history. The credit score depends on these data that are analyzed in order to provide a certain number or grade to the individual.
Majority of the credit scores are prepared with the help of multiple scorecard design. To bring out the credit scores, an individual is generally compared with others. After this, the mathematical variables are used by the credit scoring systems. Once the score of the individual is determined, he or she is placed in a group of same kind of credit score holder. There are a number of systems that are used to bring out the credit score of an individual. Some of the popular systems of determining credit scores are FICO, CE Score, VantageScore and so on. Application of Credit Score Whenever an individual applies for a loan of any kind, the interest rates applicable on the loan amount are decided after going through the credit scores. At the same time, decisions regarding the maximum loan amount that can be approved and the tenure of the loan are also dominated by these credit scores. The maximum credit limits on the credit cards are also decided with the help of these credit scores. Federal Regulation Regarding Credit ScoreThere are federal regulations regarding the application of models to bring out the credit scores of an individual. A number of bases of calculating credit scores are prohibited by law. The prohibited bases are race, sex, color, religion and so on. At the same time, the law ensures that the models that are used for bringing out the credit scores are statistically sound. Instead of this, if any individual is not satisfied with his or her own credit score, the credit score providing agency is liable to provide the individual with information regarding the scoring.
Last Updated on : 9th July 2013