Credit Scores Explained
Credit Scores Explained
This time I want to explain what a credit score is and what it’s really indicating. There are many different versions of credit scores available and there are many different companies that provide credit scores. FICO® for example has over 50 different scores available to lenders that they pick from, depending on their specific needs.
VantageScore® is the new company on the block, that has come along and created a scoring models similar to FICO®’s and Vantage is on their third version of credit score. A credit score is not judge of your good or bad credit behavior. It is simply trying to predict the likelihood that a borrower is going to have problems paying in the future based in past payment behavior. Credit scores only look at your past payment history, it does not look at your age, race, where you live, it doesn’t look at your income it doesn’t look at ethnic background credit scores don’t look at anything like that.
It simply looks at how someone paid in the past and predicts how they will pay in the future. That is all that is included when you create a credit score.
If a borrower has a 600 credit score, every other loan is probably going to be a collection problem. If you look at loans provided to borrowers at 680 credit score you have one bad loan for every twenty one good loans.
A bad loan is not predicting that the borrower will default, but that there will be a collection problem. It may default, but there is a wide variety of things it indicate a bad loan. Someone who pays late all the time, somebody who misses some payments, that’s what they’re predicting.
Credit scores predict the likelihood that you’ll pay your bills on time in the future based on how you paid in the past. I can tell you very recently FICO® has entered into an agreement with a company to do some research on Facebook activity and how that could impacts credit scores so there looking at more sources of data than ever before.
“If you look at how many times a person says ‘wasted’ in their profile, it has some value in predicting whether they’re going to repay their debt,” FICO CEO Will Lansing told the Financial Times. There is so much data out there companies are trying to use it to predict whether or not consumers are going to pay their bills on time. I know that is a little scary but you need to think about what you’re posting and how that might affect you. I just thank god there was no facebook when I went to college because my credit score would have been impacted.
FICO® was started as the Fair Isaac COmpany started in 1956 by Bill Fair and Earl Isaac with $400 and in 2014 they had revenues of almost eight hundred million dollars. It’s a very large company and they are starting to predict other behavior as well. That is what “big data” is all about, predicting consumer behavior and then be able to market to them.
Credit Scores try to predict the likelihood someone going to pay in the future based on how they have paid in the past. That is credit scores explained.
Be sure to check out my www.getloanready.com website it is free, there are worksheets and videos to help you take six steps to a better credit score. They can really help anyone and I hope you take advantage of it. Credit Scores Explained
If you want to see more videos about credit and credit scoring check these out at www.thecreditguy.tv. If you are a mortgage lender please share this on your Facebook or LinkedIn page. If you have any questions, leave them down below I’d be happy to answer them.