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Credit Scoring Beyond the Numbers. MASFAA Conference 2006. Presenter. Sean Kiley Vice President of Operations for Key Education Resources. Goals of Presentation. Improve your understanding of credit scoring Historical perspective Calculation Types Usage
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Credit ScoringBeyond the Numbers MASFAA Conference 2006
Presenter Sean Kiley Vice President of Operations for Key Education Resources
Goals of Presentation • Improve your understanding of credit scoring • Historical perspective • Calculation • Types • Usage • Demonstrate validity of credit score utilization • Increase awareness for the need to manage your credit • Provide resources to manage your credit
Facts and Myths of Credit Scoring Take the test True or False ? • Closing accounts will increase your CB score • Checking your own score will decrease your CB Score • Credit Counseling will decrease your CB score • Paying all of your debts on time will ensure your CB Score is the highest it can be. • Lenders look at more than 1 score to evaluate borrowers GROUP SCORE: ??
History of Credit Scoring:Subjective Lending • Lenders relied on subjective factors to make decisions • Intuitive measures • Results were slow, inconsistent and unreliable
Item Pts Income 1 Employed 1 References 1 Debt Ratio < 40% 1 $10K on deposit 1 Total 5 Standardization and point system arose to eliminate human bias, but were still tied to intuitive measures History of Credit Scoring:Point Systems
History of Credit Scoring:Predictive Scoring Models • Credit scoring was invented in the 1950s by Fair, Isaac Inc. • In mid 1980s, credit granting took a giant leap forward when statistical models were built that considered numerous variables and combinations of variables.
Credit Scoring is a system used to facilitate decision making. Method of converting large amounts of difficult to compare data into a single point score that facilitates comparison Process of analyzing past performance trends to predict future performance What Is Credit Scoring ?
How Is a Credit Scoring Model Developed • Analysis of a large set of consumers (>= 1 Million) • Identification of common variables that define behavior • Statistical models are then built that assign weights to each variable • Adding all variables combines to make an individual score
Types of Credit Scoring • Classic FICO • Equifax Bankruptcy Navigator Index • Experian: Scorex Plus • NextGen FICO • Industry Specific Risk Models (auto, credit card) • Custom credit scoring • Vantage
Alternative Credit Scoring • MarketMax (Equifax) • Crossview (Experian)
Scoring Model ExampleFICO • Classic FICO Score • Developed by Fair, Isaac Inc. • All 3 major credit reporting agencies utilize score • Beacon Equifax • Empirca TransUnion • Experian Experian • Score range between 300 – 850 • Median = 723
What Is Your FICO Credit Score? • Forecast of how well you will repay a loan as agreed during the next 24 months – the higher the score, the better the forecast that you will repay • Snapshot of your credit history at a particular point in time • Only includes factors related to an individual’s credit • Always changing
What FICO Credit Scoring is Not • Race, color, religion, national origin, sex or marital status • Your age • Your employment information • Where you live • Non-credit inquiries • Any information not found in your credit
FICO Credit Score Components Level of New Credit Types of Credit In Use CB Score Amount Owed History of Payments Length of Credit History
Serious delinquency Serious delinquency and public record Derogatory public record Time since delinquency is too recent Level of delinquency on accounts Number of accounts with delinquency Amount owed on accounts Balances to credit limits on revolving accounts too high Length of time accounts have been established Too many accounts with balances FICO Credit Scoring Top 10 Factors
Why Use Credit Scoring? • Speed • Consistency • Objectivity • Cost Effectiveness • Reliability • Strong Analytical Support • Supports increased lending • > 90% of Top largest financial institutions use score to make billions of credit decisions annually
Credit Scoring Utilization in Education Industry Credit Scoring is a system used to facilitate decision making. • Lending decision Credit • Servicing decision Forbearance • Collection decision Levels • Marketing decision Pre-approvals
Why You Want to Manage Your Credit Because it is widely used to make decisions about you: • Lenders • Landlords • Insurance • Employers • Government Licensing
Easier access to credit Lower rates Savings What do you get out of it? A 30 point average score increase nationwide would translate into a $16 billion savings in credit card finance charges alone.
Managing Your CreditFixing Errors • Obtain your credit reports) • Gather information to validate dispute • Dispute with Credit Bureaus / Dispute with Creditor • Follow-up
Managing Your CreditFixing Errors – Cont. • Document discrepancies in letter to the credit agency detailing: • Name, address, SSN • Account and account #’s disputing • The information you are disputing and why • Any documentation to support your claim • A request for an updated credit report reflecting the correct information
Getting Your Credit Report • 2003 Fair and Accurate Credit Transactions Act (FACT ACT) • Annual Credit Report.COM • (877) FACTACT • Must provide free if denied credit within 60 days • Review for accuracy annually • Dispute incorrect information
Resources for Credit Bureaus and FICO Scores CBI/Equifax 1(800)685-1111 www.equifax.com MYFICO.COM TransUnion Corp 1(800)888-4213 www.transunion.com ANNUALCREDIT REPORT.COM Experian 1(888)397-3742 www.experian.com
Credit Bureau and Credit Score Example • Equifax Credit Bureau • FICO CB Score: Beacon • Major factors • Negative Tradelines • Public Records • Debt • Score
Credit Summary • Pay bills on time • Manage your debt load appropriately • Review your credit • Repeat
Questions MASFAA Conference 2006
