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Using a statistical program, the creditor compares this information with
the credit performance of consumers with similar profiles.This program
comes up with a score on how likely you are to repay the loan.
Why is it used?
Credit scoring treats all applicants objectively rather than relying on
judgement factors.
How is a credit scoring model developed?
A creditor selects a random sample of it's customers and analyzes it
statistically to identify characteristics that relate to credit worthiness.
Then each of these factors is assigned a weight based on how strong a
predictor it is of who would be a good credit risk. Each creditor may use
it's own credit scoring model, different scoring models for different types
of credit or a generic model made by a credit scoring company. This is why
you may be approved for credit with one company and not another
A credit scoring company may not use certain characteristics like race,
sex, marital status, national origin, or religion as factors. They are
allowed to use age in properly designed scoring systems but it must give
equal treatment to elderly applicants.
How can I improve my score?
Only the creditor can explain what might improve your score under their
model but generally speaking the following things can improve your scores:
Paying your bills on time - Payment history is a significant factor
because every creditor wants to be paid on time.
Lowering outstanding debt - If your debt is close to your credit limit
this is likely to lower your score.
Limiting the number of accounts you have - Although it's good to have
established credit accounts, too many can have a negative effect on your
score.
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