Demystifying Credit Scoring

Written By: Glenn Michaels

What is a credit score?

A credit score is a complex mathematical number generated that represents your estimated measure of credit risk. Typically the higher the score the less risk for the person requesting credit. Credit scores take into account numerous factors in your credit history and generated at the time a creditor requests credit report. Your credit score is usually generated every time a credit report is ordered and is included with the credit report to be used by creditors. Your credit score is a number that changes as new accounts are added or an account is paid off as well as the payment history is updated. Your score can change daily as payments are updated. Your credit score is very important because it determines whether a person qualifies for future credit and the interest rates can vary based on the credit score.

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Why and how is credit scores used?

Most companies use your credit score to approve and to calculate the rate they will offer a borrower for a credit card or other loan. The higher the credit score the lower the interest rate that will be charged. The lower the credit score the higher the interest rate will be charged if the credit can be obtained at all. A good credit score can save a person a lot of money in interest charges. Many creditors look at the credit score to as a measure of how likely you will make your payment on time. Credit sores help creditors assess risk because they are consistent and objective so all consumers within certain credit score ranges will get the same offer.

Before credit scoring a creditor might have denied someone because of a subjective judgment by an underwriter and it was inconsistent because human judgment was prone to mistakes and could be biased. Now everyone regardless of ethnicity, sexual orientation, race, national origin, receipt of public assistance or the exercise of rights under the Equal Credit Opportunity Act are qualified based on their credit score and their ability to pay the debt.

Who uses credit scores and how are they used?

Virtually all lenders use credit scores to determine if they will grant credit and the interest rate that they will use. The credit scoring system saves time and the need to manually underwrite or an applicant’s credit report to approve or deny a loan. This provides for a faster and predictable credit decision. A credit score is a very important indicator of the applicant’s ability to repay and the creditworthiness of a borrower.

What impacts your credit score?

There are numerous factors that impact a person’s credit score and will vary depending on the information used to determine the credit score. The following elements impact your credit score:
Credit type, number of accounts and age of accounts and the total amount of debt;
Amount of credit balances to credit limits issued. Number of accounts that in good standing.
The number of late payments and severity of late payments; number of recent credit inquiries. What is the credit score range?
Credit scores from the lowest credit score of 350 to the highest of credit score of 850. The higher the credit score represents the consumer’s ability to repay the credit.

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How do credit scores affect a consumer?

Credit scores are calculated from information in your credit file such as total debt, amount of debt to available credit, types of accounts, number of late payments, age of accounts, and the number of inquiries. Credit scores give creditors a subjective rating of the ability and creditworthiness. It is important to know that the credit score can change weekly as your credit changes. An individual can get a different credit score from week to week as credit information is entered into your credit profile. Your credit score may go up or down in a week depending on your payments or non – payment of creditors, credit inquiries, and legal matters.



About The Author

Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.