Credit Basic Termologies

Dr Watson Goh By Dr Watson Goh, 14th May 2011 | Follow this author | RSS Feed
Posted in Wikinut>Money>Loans

Like to understanding some credit terms & slogan. Read on..................

Credit Terms

For years, the entire credit scoring process was shrouded in mystery. Fair Isaac and other scoring firms said that if they revealed the scoring system -- and the exact criteria to determine that score -- their services wouldn't be needed anymore.

In June 2000, Fair, Isaac surrendered to increasing pressure from Congress and consumer groups and released a list of the criteria it uses to determine credit scores. In addition, the company plans to develop a web feature so you can check your own score.

The five main criteria are :

* Your payment history payment history on credit cards, retail accounts at stores, installment loans, and mortgages. 35% of total

* Amounts owed. What is important is how many accounts have balances and how much of the total credit line is being used on
credit cards and other "revolving credit" accounts. 30% of total score.

* Length of credit history. That's why parents should help children establish credit histories before they go out on their own. 15% of
total score.

* New credit. Applying for too much new credit is one of the easiest ways for people to inadvertently harm their credit score. (10% of
total score)

* Types of credit. This takes into account your mix of installment loans, mortgages, retail accounts, credit cards and finance
company accounts. (10% of total score)

The scores that companies like Fair, Isaac compile are sent to the credit reporting agencies as composite numbers.

In addition to your salary and other factors mentioned above, here are some of the things that scoring agencies consider :

* Your education level. It sounds arbitrary, but it's true. A college-educated person is given more "points" than a high school
graduate, for example.

* The number of years you've lived in a single location. If you've moved around a lot, you lose precious points. If you've moved
because of a better-paying job, you can recoup some of those points if your salary has increased, for example.

* The number of years you've worked for a single employer. Scoring agencies like people who are stable. That's why they assign
more points to people who've lived in a particular place for several years or who've worked for a single employer for many years.

Are you a homeowner ?

If you are, you get additional points. Renters are considered more transient and less reliable to repay their loans.

If all of this sounds arbitrary or unfair, remember that scoring systems have allowed department stores and other lending agencies to offer those "on-the-spot" credit approvals. You know the routine. You fill out some basic information on a card and five minutes later (if the computer is working properly), you're either approved or disapproved for a loan.

Credit scoring spurs growth

McCorkell argues that credit scoring has helped fuel the economic boom of the 1990s because it allowed those who grant credit to grant much more of it -- 20% to 30% more, by his estimates -- than they otherwise would have.

"Today more credit at lower rates is available to a broader spectrum of American consumers than anyone could have imagined just a generation ago," he says.

Edward P. Howard, an attorney at the Center for Law in the Public Interest in Los Angeles, agrees that credit scoring has helped provide economic growth without inflation. But he worries about what can go wrong. There are a lot of elements stored in the computer.

"Even a fairly simple credit scoring system is likely to have 10,000 or 20,000 different possible combinations," McCorkell says. That's a lot of information to keep straight. What if it gets scrambled up ?

OK, Howard knows it isn't realistic to think that Jimmy Stewart is going to loan any of us the money to buy a home today. But he's worried about your financial viability -- your ability to borrow money, get a job, buy a home or rent an apartment. It all depends on a database that's supposed to be fail-safe.

Howard's favorite movie is "Dr. Strangelove," the Cold War satire in which a mad U.S. general finds a loophole that allows him to launch a nuclear strike against the Soviet Union. So back in the real world, could this one credit database have a flaw that could destroy your hopes of buying a new home ?


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author avatar Md Rezaul Karim
20th Dec 2011 (#)

Thanks for knowledge sharing.

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