Credit scoring is a system that creditors use to help determine whether to give you credit or not. Information about you and your credit experiences, such as your bill paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts is collected from your credit application and credit report. 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.
About the author
Michael Anderson writes for http://www.goodcreditreport.info where you can find out more about good credit reports and other topics.