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Credit Scores are a Fair Measure to Help Lenders Estimate Potential Risks - Essay Example
Author : colelorna
Finance & Accounting
Pages 4 (1004 words)
Credit Scores are a Fair Measure to Help Lenders Estimate Potential Risks Introduction Credit scores are numerical expressions that statistically analyze the credit files of an individual so as to represent the individual’s credit worthiness. The credit rating of a person may be influenced by the ability of the person to pay loan, interest, credit amount used, saving patterns, spending patterns and debt (consumer Reports, 2005)…
To simplify their customers’ analytical process, mathematical algorithm can be used by different bureaus to provide a score that customers can use to rapidly assess an individual’s likelihood to repay a certain debt, if the frequency by which other individuals in such situations default in meeting their obligations is given. This means that credit bureaus have to create several credit scores for many individuals. Credit scores that are over 700 are pretty good, and most of them go up to 800 (consumer Reports, 2005). The most widely used method of calculating credit score is FICO, though there are many other methods. It is normally used by mortgage lenders, who use risk-based system to find out the possibility of a borrower to default financial obligations to mortgage lenders. It is important that each individual is always aware of his credit score so that you can work towards improving it. Individuals are therefore advised by consumer welfare advocates to review their reports of credit at least once every year, so as to ensure their accuracy, and hence increase chances of their credit qualifications (consumer Reports, 2005). ...