Credit Scoring

Monday December 29th, 2003

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What is credit scoring?

Credit scoring is another tool lenders use to assess the credit worthiness of a potential borrower. This tool is often used, in addition to the analysis of the borrower's financial statements, key financial ratios. RMA (Robert Morris Associates) ratios are sometimes crucial in the lenders decision to make a loan and/or in establishing the terms and conditions of that loan.

Some key facts to keep in mind concerning Credit Scoring include the following:

Credit Score Factors
1	Many lenders use Credit Scores, or more specifically credit bureau scores, to help determine whether a business or individual is likely to repay a loan on time.
2	Credit Scores serve as a snap shot that records the picture of your credit risk at a specific point in time.
3	The Credit Score is just one method used by the lenders to make a credit decision.
4	The Credit Score is a summary of the borrower’s credit report reduced to a numerical measurement that is used to reflect the borrower’s ability to manage credit.
5	Credit Scores are based on the records compiled by the credit bureau and summarizes the information reported each month by the borrower’s creditors (i.e. the amount of existing credit and payment history).

Credit Scores are derived from five (5) major categories of credit information. In the order of importance they include:

Five Major Categories of Credit Information
1	Late Payments, Delinquencies & Bankruptcies;
2	Late Payments, Delinquencies & Bankruptcies;
3	Outstanding Debt;
4	Length of Credit History;
5	New Applications For Credit;
6	Types of Credit in Use.

You can contact any of the major credit bureaus and to obtain a copy of your credit report.

Credit Companies
1	Experian (formerly TRW) National Consumer Assistance Center 475 Anton Blvd. Costa Mesa, Ca. 92626 888 EXPERIAN (888-397-3742) http://www.equifax.com
2	Equifax Equifax P.O. Box 740241 Atlanta, GA 30374-0241 888-202-4025 http://www.experian.com
3	Trans Union Trans Union Corp. P. O. Box 2000 Chester, PA 19022 800-916-8800 http://www.tuc.com/

Tips:

What is the information on my credit report is incorrect?
If some of the information in your credit report is incorrect, you can request that the credit bureau correct any errors. The credit bureau must investigate and respond within 30 days. Loan Officers make loan decisions, not Credit Scores. Credit Scores are tools for helping the loan officer make the decision.

How do lenders obtain Credit Scores?
The lender will use its computer to calculate the scores from its own internal credit scoring model or automatically obtain a score from a credit bureau.