Credit Scoring Beyond the Numbers                                            
Presenter <ul><li>David Nemeth  Credit Manager for Key Education Resources </li></ul>
Goals of Presentation <ul><li>Improve your understanding of credit scoring  </li></ul><ul><ul><li>Historical perspective <...
Facts and Myths of Credit Scoring <ul><li>Take the test </li></ul><ul><li>True of  False ? </li></ul><ul><li>Closing accou...
History of Credit Scoring: Subjective Lending <ul><li>Lenders relied on subjective factors to  make decisions </li></ul><u...
History of Credit Scoring: Point Systems <ul><li>Item Pts </li></ul><ul><li>Income 1 </li></ul><ul><li>Employed 1 </li></u...
History of Credit Scoring: Predictive Scoring Models <ul><li>Credit scoring was invented in the 1950s by Fair, Isaac Inc. ...
What Is Credit Scoring ? <ul><li>Credit Scoring is a system used to facilitate decision making. </li></ul><ul><li>Method o...
How Is a Credit Scoring Model Developed <ul><li>Analysis of a large set of consumers (>= 1 Million) </li></ul><ul><li>Iden...
Types of Credit Scoring <ul><li>Classic FICO  </li></ul><ul><li>Equifax Bankruptcy Navigator Index </li></ul><ul><li>Exper...
Alternative Credit Scoring <ul><li>MarketMax (Equifax) </li></ul><ul><li>Crossview (Experian ) </li></ul>                 ...
Scoring Model Example FICO <ul><li>Classic FICO  Score </li></ul><ul><ul><li>Developed by Fair, Isaac Inc. </li></ul></ul>...
Fair Isaac Timeline <ul><li>1956  – FairIsaac founded by Bill Fair & Earl Isaac </li></ul><ul><li>1958  – Markets to Top 5...
  What Is Your FICO Credit Score? <ul><li>Forecast of how well you will repay a loan as agreed during the next 24 months –...
  What FICO Credit Scoring is Not <ul><li>Race, color, religion, national origin, sex or marital status </li></ul><ul><li>...
FICO Credit Score Components CB Score History of  Payments Amount Owed Types of Credit In Use Level of new  Credit Length ...
FICO Credit Score Component Weighting
Credit Statistics: National Averages
  FICO Credit Scoring Top 10 Factors   <ul><li>Serious delinquency </li></ul><ul><li>Serious delinquency and public record...
National Distribution of FICO Scores
Why Use Credit Scoring? <ul><li>Speed </li></ul><ul><li>Consistency </li></ul><ul><li>Objective </li></ul><ul><li>Cost Eff...
Reliability of FICO Scoring   Validation Graph
Validation of Major FICO Score Ranges
Credit Scoring Utilization in Education Industry <ul><li>Credit Scoring is a system used to facilitate decision making. </...
Why You Want to Manage Your Credit <ul><li>Because it is widely used to make decisions about you: </li></ul><ul><li>Lender...
What do you get out of it? <ul><li>Easier Access to credit </li></ul><ul><li>Lower rates </li></ul><ul><li>Savings </li></...
Managing Your Credit Fixing Errors <ul><li>Contact All 3 Credit Reporting Agencies </li></ul><ul><li>Contact the Creditor ...
Managing Your Credit Fixing Errors – Cont. <ul><li>Document discrepancies in letter to the credit agency detailing: </li><...
Getting Your Credit Report <ul><li>2003 Fair and Accurate Credit Transactions Act (FACT ACT) </li></ul><ul><li>Annual Cred...
Resources for Credit Bureaus and FICO Scores <ul><li>Experian </li></ul><ul><li>1(888)397-3742 </li></ul><ul><li>www.exper...
What Is on the  Credit Report <ul><li>Personal Information </li></ul><ul><ul><ul><li>Names, current & previous addresses, ...
Credit Bureau Example <ul><li>Equifax Credit Bureau </li></ul><ul><ul><li>FICO CB Score:  Beacon </li></ul></ul><ul><ul><u...
Credit Scores & Mortgage Rates:  Massachusetts
Credit Scores & Mortgage Rates:  New Jersey
Credit Summary <ul><li>Pay bills on time </li></ul><ul><li>Manage your debt load appropriately </li></ul><ul><li>Review yo...
Questions                                            
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Credit Scoring Beyond the Numbers

  1. 1. Credit Scoring Beyond the Numbers                                         
  2. 2. Presenter <ul><li>David Nemeth Credit Manager for Key Education Resources </li></ul>
  3. 3. Goals of Presentation <ul><li>Improve your understanding of credit scoring </li></ul><ul><ul><li>Historical perspective </li></ul></ul><ul><ul><li>Calculation </li></ul></ul><ul><ul><li>Types </li></ul></ul><ul><ul><li>Usage </li></ul></ul><ul><li>Demonstrate validity of credit score utilization </li></ul><ul><li>Increase awareness for the need to manage your credit </li></ul><ul><li>Provide resources to manage your credit </li></ul>
  4. 4. Facts and Myths of Credit Scoring <ul><li>Take the test </li></ul><ul><li>True of False ? </li></ul><ul><li>Closing accounts will increase your CB score </li></ul><ul><li>Checking your own score will decrease your CB Score </li></ul><ul><li>Credit Counseling will decrease your CB score </li></ul><ul><li>Paying all of your debts on time will ensure you have have a good CB score </li></ul><ul><li>Lenders look at more than 1 score to evaluate borrowers </li></ul><ul><li>GROUP SCORE: ?? </li></ul>
  5. 5. History of Credit Scoring: Subjective Lending <ul><li>Lenders relied on subjective factors to make decisions </li></ul><ul><li>Intuitive Measures </li></ul><ul><li>Results were slow, inconsistent and unreliable </li></ul>
  6. 6. History of Credit Scoring: Point Systems <ul><li>Item Pts </li></ul><ul><li>Income 1 </li></ul><ul><li>Employed 1 </li></ul><ul><li>References 1 </li></ul><ul><li>Debt Ratio < 40% 1 </li></ul><ul><li>$10K on deposit 1 </li></ul><ul><li>Total 5 </li></ul><ul><li>Standardization and point system arose to eliminate human bias, but were still tied to intuitive measures </li></ul>
  7. 7. History of Credit Scoring: Predictive Scoring Models <ul><li>Credit scoring was invented in the 1950s by Fair, Isaac Inc. </li></ul><ul><li>In mid 1980s, credit granting took a giant leap forward when statistical models were built that considered numerous variables and combinations of variables. </li></ul>
  8. 8. What Is Credit Scoring ? <ul><li>Credit Scoring is a system used to facilitate decision making. </li></ul><ul><li>Method of converting large amounts of difficult to compare data into a single point score that facilitates comparison </li></ul><ul><li>Process of analyzing past performance trends to predict future performance </li></ul>
  9. 9. How Is a Credit Scoring Model Developed <ul><li>Analysis of a large set of consumers (>= 1 Million) </li></ul><ul><li>Identification of common variables that define behavior </li></ul><ul><li>Statistical models are then built that assign weights to each variable </li></ul><ul><li>Adding all variables combines to make an individual score </li></ul>
  10. 10. Types of Credit Scoring <ul><li>Classic FICO </li></ul><ul><li>Equifax Bankruptcy Navigator Index </li></ul><ul><li>Experian: Scorex Plus </li></ul><ul><li>NextGen FICO </li></ul><ul><li>Industry Specific Risk Models (auto, credit card) </li></ul><ul><li>Custom credit scoring </li></ul>
  11. 11. Alternative Credit Scoring <ul><li>MarketMax (Equifax) </li></ul><ul><li>Crossview (Experian ) </li></ul>                                  
  12. 12. Scoring Model Example FICO <ul><li>Classic FICO Score </li></ul><ul><ul><li>Developed by Fair, Isaac Inc. </li></ul></ul><ul><ul><li>All 3 major credit reporting agencies utilize score </li></ul></ul><ul><ul><ul><li>Beacon Equifax </li></ul></ul></ul><ul><ul><ul><li>Fico Classic TransUnion </li></ul></ul></ul><ul><ul><ul><li>Experian Experian </li></ul></ul></ul><ul><ul><li>Score range between 300 – 850 </li></ul></ul><ul><ul><li>Median = 723 </li></ul></ul>
  13. 13. Fair Isaac Timeline <ul><li>1956 – FairIsaac founded by Bill Fair & Earl Isaac </li></ul><ul><li>1958 – Markets to Top 50 lenders to initiate Credit Scoring- 1 Replies </li></ul><ul><li>1958 – 1 st Credit Scoring System created for American Investments </li></ul><ul><li>1981 – 1 st Fair Isaac Credit Bureau risk score introduced </li></ul><ul><li>1989 – 1 st general purpose FICO score debuts- Beacon @ Equifax </li></ul><ul><li>1991 – FICO credit bureau scores made available to all 3 credit bureau agencies </li></ul><ul><li>2001 – NextGen FICO scores made available to all 3 credit bureau agencies </li></ul><ul><li>2003 – MyFICO service becomes 1 st service offering consumers FICO scores </li></ul><ul><li>2004 – Launch of Global FICO score for worldwide markets </li></ul>
  14. 14. What Is Your FICO Credit Score? <ul><li>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 </li></ul><ul><li>Snapshot of your credit history at a particular point in time </li></ul><ul><li>Only includes factors related to an individual’s credit </li></ul><ul><li>Always changing </li></ul>
  15. 15. What FICO Credit Scoring is Not <ul><li>Race, color, religion, national origin, sex or marital status </li></ul><ul><li>Your age </li></ul><ul><li>Your employment information </li></ul><ul><li>Where you live </li></ul><ul><li>Non-credit inquiries </li></ul><ul><li>Any information not found in your credit </li></ul>
  16. 16. FICO Credit Score Components CB Score History of Payments Amount Owed Types of Credit In Use Level of new Credit Length of Credit History
  17. 17. FICO Credit Score Component Weighting
  18. 18. Credit Statistics: National Averages
  19. 19. FICO Credit Scoring Top 10 Factors <ul><li>Serious delinquency </li></ul><ul><li>Serious delinquency and public record </li></ul><ul><li>Derogatory public record </li></ul><ul><li>Time since delinquency is too recent </li></ul><ul><li>Level of delinquency on accounts </li></ul><ul><li>Number of accounts with delinquency </li></ul><ul><li>Amount owed on accounts </li></ul><ul><li>Balances to credit limits on revolving accounts too high </li></ul><ul><li>Length of time accounts have been established </li></ul><ul><li>Too many accounts with Balances </li></ul>
  20. 20. National Distribution of FICO Scores
  21. 21. Why Use Credit Scoring? <ul><li>Speed </li></ul><ul><li>Consistency </li></ul><ul><li>Objective </li></ul><ul><li>Cost Effective </li></ul><ul><li>Reliability </li></ul><ul><li>Strong Analytical Support </li></ul><ul><li>Support increased lending </li></ul><ul><li>> 70% of Top 100 largest financial institutions use score to make billions of credit decisions annually </li></ul>
  22. 22. Reliability of FICO Scoring Validation Graph
  23. 23. Validation of Major FICO Score Ranges
  24. 24. Credit Scoring Utilization in Education Industry <ul><li>Credit Scoring is a system used to facilitate decision making. </li></ul><ul><li>Lending decision Credit </li></ul><ul><li>Servicing decision Forbearance </li></ul><ul><li>Collection decision Levels </li></ul><ul><li>Marketing decision Pre-approvals </li></ul>
  25. 25. Why You Want to Manage Your Credit <ul><li>Because it is widely used to make decisions about you: </li></ul><ul><li>Lenders </li></ul><ul><li>Landlords </li></ul><ul><li>Insurance </li></ul><ul><li>Employers </li></ul><ul><li>Government Licensing </li></ul>
  26. 26. What do you get out of it? <ul><li>Easier Access to credit </li></ul><ul><li>Lower rates </li></ul><ul><li>Savings </li></ul><ul><li>A 30 point average score increase nationwide would translate into a $16 billion savings in credit card finance charges alone. </li></ul>
  27. 27. Managing Your Credit Fixing Errors <ul><li>Contact All 3 Credit Reporting Agencies </li></ul><ul><li>Contact the Creditor in Question </li></ul><ul><li>Follow-up </li></ul>
  28. 28. Managing Your Credit Fixing Errors – Cont. <ul><li>Document discrepancies in letter to the credit agency detailing: </li></ul><ul><ul><li>Name, address, SSN </li></ul></ul><ul><ul><li>Account and account #’s disputing </li></ul></ul><ul><ul><li>The information you are disputing and why </li></ul></ul><ul><ul><li>Any documentation to support your claim </li></ul></ul><ul><ul><li>A request for an updated credit report reflecting the correct information </li></ul></ul>
  29. 29. Getting Your Credit Report <ul><li>2003 Fair and Accurate Credit Transactions Act (FACT ACT) </li></ul><ul><li>Annual Credit Report.COM </li></ul><ul><li>(877) FACTACT </li></ul><ul><li>Must provide free if denied credit within 60 days </li></ul><ul><li>Review for accuracy annually </li></ul><ul><li>Dispute incorrect information </li></ul>
  30. 30. Resources for Credit Bureaus and FICO Scores <ul><li>Experian </li></ul><ul><li>1(888)397-3742 </li></ul><ul><li>www.experian.com </li></ul><ul><li>CBI/Equifax </li></ul><ul><li>1(800)685-1111 </li></ul><ul><li>www.equifax.com </li></ul><ul><li>MYFICO.COM </li></ul><ul><li>TransUnion Corp </li></ul><ul><li>1(800)888-4213 </li></ul><ul><li>www.transunion.com </li></ul><ul><li>ANNUALCREDIT </li></ul><ul><li>REPORT.COM </li></ul>
  31. 31. What Is on the Credit Report <ul><li>Personal Information </li></ul><ul><ul><ul><li>Names, current & previous addresses, employers, DOB and spouse’s name </li></ul></ul></ul><ul><li>Credit Information </li></ul><ul><ul><ul><li>Credit granted and history & timeliness of repayment, revolving, installment or open ended, payment patterns for past 7 years </li></ul></ul></ul><ul><li>Public Record Information </li></ul><ul><ul><ul><li>Records found on public documents: bankruptcies, tax liens, collection accounts, overdue child support </li></ul></ul></ul><ul><li>Inquiries </li></ul><ul><ul><ul><li>List of creditors and agencies who have requested your credit report </li></ul></ul></ul>
  32. 32. Credit Bureau Example <ul><li>Equifax Credit Bureau </li></ul><ul><ul><li>FICO CB Score: Beacon </li></ul></ul><ul><ul><ul><li>Major factors </li></ul></ul></ul><ul><ul><li>Negative Tradelines </li></ul></ul><ul><ul><li>Public Records </li></ul></ul><ul><ul><li>Debt </li></ul></ul><ul><ul><li>Score </li></ul></ul>
  33. 33. Credit Scores & Mortgage Rates: Massachusetts
  34. 34. Credit Scores & Mortgage Rates: New Jersey
  35. 35. Credit Summary <ul><li>Pay bills on time </li></ul><ul><li>Manage your debt load appropriately </li></ul><ul><li>Review your credit </li></ul><ul><li>Repeat </li></ul>
  36. 36. Questions                                         
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