Credit scoring or credit rating is the analysis of an individual’s credit history, used to determine a person’s credit worthiness.
Businesses use credit scoring models to make lending and pricing decisions, market to new customers, maintain existing accounts, and even predict cash flow and revenue.
Credit scoring plays a role in whether you qualify for credit cards, loans and other credit-based products and services.
Knowing how credit scoring works can help you adjust your credit habits to maintain a desirable credit score.
Credit scoring is a predictive analysis of information from a consumer’s credit report, used to determine the consumer’s credit worthiness. Businesses use credit scoring systems to make financing decisions, market to new customers, maintain accounts, and create financial projections.
Credit scoring assigns points to a consumer’s credit information and totals the points to create a three-digit credit score. When a consumer applies for credit with a bank, the lender uses a credit scoring system to then view the applicant’s credit score and, therefore, make lending and pricing decisions.
Credit scoring uses information from consumer reporting agencies to produce a three-digit credit score that allows companies to quickly gauge, sometimes automatically, the likelihood that a consumer will default on a debt obligation.
In addition to analyzing credit information, credit scoring models can also take into account changes in consumer behavior and broader economic patterns, such as a recession.
There are several types of credit ratings, including:
All companies may use basic credit scoring models rather than an industry-specific version of credit scoring.
Credit card decisions:
There are credit scoring models created by credit card issuers to determine the default risk of credit card applicants.
Auto dealers and lenders can assess the risk level of consumers seeking auto financing and determine the likelihood of default within a 12-month period.
Credit scoring is a statistical analysis of consumer credit report information used to determine the likelihood that a consumer will or will not default on a credit obligation.