Introduction to the US FICO scoring system
The personal credit scoring system in the United States is mainly FICO launched by Fair IsaacCompany, from which the scoring system is named. Generally speaking, what Americans often talk about is your score, usually referring to your current FICO score. In fact, Fair Isaac has developed three different FICO scoring systems, each of which is used by the three major U.S. credit bureaus with different names.
| credit bureau name | FICO Scoring System Name |
|---|---|
| Equifax | BEACON* |
| Experian | ExperianPFair Isaac Risk Model |
| TransUnion | FICO Risk Score, Classic |
The three scoring systems developed by Fair Isaac use the same methodology and have been rigorously tested individually. Even if a customer's historical credit data is exactly the same across the three credit bureau databases, the credit scores derived from the different credit bureaus' scoring systems may not be the same, but the difference is similar.
Global distribution map of fico scoring system
Credit scores from the FICO scoring system range from 300-850 points. The higher the score, the less credit risk the customer has. But the score itself does not indicate whether a customer is good or bad, and lenders usually use the score as a reference to make loan decisions. Each lender will have its own lending strategy and criteria, and each product will have its own level of risk, which determines an acceptable level of credit score. Generally speaking, if the borrower's credit score reaches 680 points or more, the lender can consider the borrower's credit outstanding and can agree to grant the loan without hesitation. If the borrower's credit score is lower than 620, the lender will either ask the borrower to increase the guarantee, or simply find various reasons to refuse the loan. If the borrower's credit score is between 620-680, the lender will conduct further investigation and verification, and use other credit analysis tools to deal with it on a case-by-case basis. At present, the distribution of credit scores in the United States is shown in Figure 1. FICO score is mainly used by lenders to quickly and objectively measure the credit risk of customers and shorten the credit process. FICO scores are widely used in the United States. People can obtain credit loans faster based on the scores, and even some loans can be applied directly through the Internet. Approval can be obtained in seconds, shortening transaction time, improving transaction efficiency, and reducing transaction costs. The use of a credit scoring system can help lenders make more impartial decisions without introducing personal biases. At the same time, factors such as the customer's gender, race, religion, nationality, and marital status have no impact on the credit score, guaranteeing The objectiveness and fairness of the rating. In the scoring system, each item of credit information has a different weight. The earlier the credit information, the less the impact on the score.
The credit score range obtained by the FICO scoring system is between 300 and 850. The higher the score, the better the credit score of the customer. The smaller the risk, but the score itself does not indicate whether a customer is good or bad. Lenders usually use the score as a reference to make loan decisions. Each lender will have its own loan strategy and standards.
| credit score | percentage of people | Cumulative percentage | Default rate |
|---|---|---|---|
| 300~499 | 2% | 2% | 87% |
| 500~549 | 5% | 7% | 71% |
| 550~599 | 8% | 15% | 51% |
| 600~649 | 12% | 27% | 31% |
| 650~699 | 15% | 42% | 15% |
| 700~749 | 18% | 60% | 5% |
| 750~799 | 27% | 87% | 2% |
| 800~850 | 13% | 100% | 1% |
From the above table, we can see two rules: one is that the proportion of people with particularly low and high credit scores is relatively small, and most of the credit scores are medium, generally showing a left-skewed normal distribution; the second is the credit score score The higher the value, the lower the default rate. This is the core value of credit scoring. Important decisions such as whether to issue, loan amount, and whether to require collateral can be made according to the level of credit score. Each product will have its own level of risk, which determines an acceptable level of credit score. Generally speaking, if the borrower's credit score reaches 680 points or more, the lender can consider the borrower's credit outstanding and can agree to release the loan without hesitation. If the borrower's credit score is lower than 620 points, the lender may ask the borrower Increase the guarantee, or simply find various reasons to decline the loan. If the borrower's credit score is between 620-680 points, the lender will conduct further investigation and verification, and use other credit analysis tools to deal with it on a case-by-case basis.
There are five main factors concerned in the FICO scoring model, which are the customer's credit repayment history, the number of credit accounts, the years of credit use, the type of credit being used, and the newly opened credit accounts.
(1) Credit repayment history
The most important factor affecting the FICO score is the customer’s credit repayment history, which accounts for about 35% of the total influencing factors. The payment history mainly displays the customer’s historical repayment situation to help lenders understand whether the customer has a history The overdue repayment records mainly include:
(1) Repayment records of various credit accounts, including credit cards (such as Visa Master Card American Express Discover), retail accounts (credit obtained directly from merchants), amortization loans, financial companies accounts, mortgages.
(2) Public records and check deposit records, which mainly include bankruptcy records, foreclosure records, legal proceedings, lien records and judgments. Events involving large amounts of money have a greater impact on the FICO score than events involving small amounts. For the same amount of money, events that occur later have a greater impact on the score than events that occur earlier. Generally, bankruptcy information will be recorded on the credit report for 7-10 years.
(3) The specific situation of overdue repayment, including, the number of days overdue, the amount outstanding, the number of overdue repayments and the time since the overdue occurrence length etc. For example, an overdue record that occurred in the previous month will have a greater impact on the FICO score than a 90-day overdue record that occurred in the previous year. According to statistics, about less than 50% of people have a record of overdue repayment for 30 days, and only about 30% of people have a record of overdue repayment for more than 60 days. And 77% of people have never been overdue for more than 90 days. Only less than 20% of the people who have made a default have been forcibly closed their credit accounts by the bank
Significant defaults in recent months
(2) The number of credit accounts
This factor is second only to the repayment history, and its impact on the score accounts for 30% of the total influencing factors. For the lender, if a customer has a credit account and needs to repay the loan, it does not mean that the customer's credit High risk. Conversely, if a customer's limited repayment ability is exhausted, it means that the customer has a high credit risk and is likely to overuse credit, which also means that he has a higher possibility of overdue repayment. This type of factor is mainly to analyze how many credit accounts are enough for a customer, so as to accurately reflect the customer's repayment ability.
Total balance in revolving account total limit ratio
(3) Years of credit use
This factor accounts for 15% of the total influencing factors. In general, the longer the credit history, the more it increases the FICO credit score. This factor mainly refers to the age of the credit account, which not only considers the age of the earliest opened account, but also includes the age of the newly opened credit account, and the average age of the credit account. According to the credit report, the average age of the earliest credit accounts opened in the United States is 14 years, more than 25% of the customers have a credit history of more than 20 years, and only less than 5% of the customers have a credit history of less than 2 years
(4) Newly opened
This factor accounts for 10% of the total influencing factors. In today's economic life, people always tend to open more credit accounts and choose the consumption method of credit shopping. The FICO scoring system also reflects this tendency in the credit score. According to the survey, customers who open multiple credit accounts in a short period of time have higher credit risk, especially those with a short credit history. This factor mainly includes
(1) the number of newly opened credit accounts, and the system will record the type and total number of accounts newly opened by customers;
(2) the age of the newly opened credit accounts;
(3) the current number of credit applications, This content is mainly obtained from the number of inquiries about the customer's credit, and the inquiries are only kept in the credit report for two years;
(4) The length of time the lender has inquired about the customer's credit
(5) The latest credit status, for newly opened credit The timely repayment of the account will improve the customer's FICO score after a period of time
(5) The type of credit being used
This factor accounts for 10% of the total influencing factors. Mainly analyze the mixed usage of customers' credit card accounts, retail accounts, installment accounts, financial company accounts and mortgage loan accounts, including: the types of credit accounts held and the number of credit accounts of each type
Main References
1,http://www.yinhang.com/a_2014_0402_197987.html
２、http://www.docin.com/p-63842901.html
