Credit Scoring :
Credit scoring is a system used by financial institutions to evaluate the creditworthiness of an individual. It is a way for lenders to determine the likelihood that a borrower will be able to repay a loan. Credit scoring is based on a variety of factors, including an individual’s credit history, credit utilization, and other financial metrics.
To determine an individual’s credit score, credit scoring models use a variety of data points, including information from credit reports, bank statements, and other financial records. The credit scoring model then assigns a score to each individual, which reflects their creditworthiness. This score is used by lenders to determine whether to extend credit to the individual and, if so, at what interest rate.
One example of a credit scoring model is the FICO score, which is used by many lenders in the United States. The FICO score is based on five factors: payment history, credit utilization, length of credit history, new credit, and credit mix. Payment history is the most important factor, accounting for 35% of the FICO score, and it considers an individual’s track record of making on-time payments. Credit utilization, which accounts for 30% of the FICO score, is the second most important factor, and it looks at how much of an individual’s available credit they are using.
Another example of a credit scoring model is the VantageScore, which is a newer model that was developed by the three major credit bureaus (Equifax, Experian, and TransUnion). The VantageScore uses a similar set of factors to the FICO score, but it puts more emphasis on recent credit behavior and includes some additional data points, such as rental payments and utility bills.
Overall, credit scoring is an important tool for lenders, as it helps them to make informed decisions about who to extend credit to. It is also a useful tool for individuals, as it can help them to understand their creditworthiness and take steps to improve their credit score if necessary.