3JM Company Inc.

Published Articles by David Balovich

Published in: Creditworthy News
Date: 1/25/00

We have received many inquiries concerning credit scoring and how it

There are several credit scoring modules available and a firm could create their own using whatever criteria they choose.

The most widely used credit scoring system is FICO named for credit scoring industry leader Fair, Isaac and Co.

The firm's software uses a debtor's past credit history and measures it against a database of habits in the general borrowing population. This information determines whether the debtor has a tendency to default on debt, file bankruptcy or have other types of financial difficulty.

There are five characteristics used in the FICO scoring system, they are:

Past delinquency; Debtors who have failed to make payments in the past tend to do the same in the future.

Credit use; A debtor maxed out or close to the limit on a line of credit is considered a higher risk.

Age of the credit file; Fair, Isaac assumes debtors who have had credit for longer periods of time are less of a risk.

Credit inquiries; Numerous credit inquiries are considered a negative.

Type of credit; A debtor who has a combination of types of credit i.e. installment and revolving loans, is considered less of a risk then a debtor with just one type of credit.

Once the data is compiled a score is generated between 300 and 800. If the score is higher then 650 everything is OK. If the score is less then 620, however, then there may be some difficulty in obtaining credit.

Lenders use these scores in addition to income, existing debt, length of time on the job/or in business and past performance on similar types of debt.

In developing a credit scoring system it is important that three things always be considered:

1. Limit the criteria to a minimum number of characteristics. Generally no more then five or six. Credit scoring is not unlike ratio analysis, the more you have the more confusing it becomes.

2. Use characteristics that will apply to all your customers.

3. Do not rely solely on the credit score for your ultimate decision.

I wish you well.

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