A credit score is a financial consumer credit rating system. It affects any application that is submitted for various types of loans: a loan for the purchase of goods, real estate, credit cards, etc. In some countries, a low credit rating affects the likelihood of getting the next loan, in other countries, for example, the UK, a consumer with a bad credit history may be refused even a home rental.
How the borrower is identified?
In the United States, the Social Security Number (SSN) is a nine-digit code assigned to US citizens and residents. SSN is a unique identifier that is often required for employment, in banks for opening accounts and issuing loans, renting apartments, and also when providing medical services.
Credit bureaus in the USA
The main bureaus in the United States are Experian, Equifax and TransUnion. Despite the fact that these are the same companies, they do not share information about the borrower’s credit history with each other.
Credit bureaus collect information about credit history and credit behavior, as well as personal information about the borrower.
How does the credit rating work?
There are several types of credit scoring used in the United States, with all major systems using a scale ranging from 300 to 850 points. To make decisions about issuing a loan, the scoring of one of the credit bureaus is usually used. The most popular model is FICO – used by about 90% of American lenders.
As noted by loan officer Barry Paperno, lenders make about a billion loan decisions annually based on FICO scoring.
Scoring is mainly calculated taking into account five factors:
- Payment history;
- New loan applications and records in the credit history about issued loans and applications (hard inquiries);
- Length of credit history;
- Types of loans used.
Also, credit bureaus in the United States may not take into account information on the use of bonded lending products – loans using an extremely high interest rate.
Attitude to old credit cards
Regardless of the valuation model or bureau, experts agree that the borrower should, if possible, keep old accounts open since the length of the average credit history is 15% of the FICO credit rating.
The presence of a high credit limit compared to the amount of the loan used in the United States is considered a positive factor.
Credit ratings exclude income and savings
Credit Bureaus clarify that the agency does not take into account income, savings, employment and taxes when calculating the rating, as this information is not included in the credit history. However, lenders can ask about this as clarifying questions and then use the consumer’s answers to make the final decision on the loan.
While this does not affect credit history in any way, the general rule is to keep the debt-to-income ratio below 30%. Otherwise, lenders may feel that the borrower has too many debts to pay off the debt on time.
Hard and soft: the impact of the number of requests on credit history
In the United States, requests for the credit history of a borrower applying for a loan affect the rating in the same way. There are two types of such requests – hard inquiry and soft inquiry.
- Soft inquiry is a credit check as part of a data check that does not appear in the credit history. For example, a credit card issuer checks without the borrower’s permission to find out if he or she is eligible for certain credit card offers. Also, soft inquiry occurs when checking the Credit Karma credit scoring and getting a certificate from work;
- Hard inquiry – checking the credit history by a lender or a credit card issuer to make a decision on a loan when applying for a home loan or another loan. It is reflected in credit history.
The number of loan applications that a consumer completes within a given period of time is 10% of his or her FICO credit rating. With each new hard inquiry, the credit rating is reduced by at least a few points.
At the same time, in both countries, the consumer must give his or her consent, before the company can conduct a thorough check of his or her credit history.