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Date: Tue, 12 Nov 2002 17:48:59 -0500
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To answer your question on the benefit of having credit history..
Using credit history to quantify risk benefits both the financial
institutions and the customers.
Everyone who has any type of credit product (credit cards, auto loans,
mortgages, installment loans, etc.) is reported to the credit bureaus. The
information reported is both negative and positive. The information available
to financial institutions from the credit bureaus can be divided into:
* type of credit products
* length of your relationship with other financial institutions
* credit lines/balances
* payment/delinquency history, and
* your search for credit
With all these information, financial institutions develop statistical models
to forecast your probability to default your loan (measures risk). These
statistical models are what they call FICO Score, Beacon, etc.(generic scores
generated by the bureaus), but most banks have their own custom models.
What financial institutions do with the score changes from one institution to
another, but they can be summarize as follows:
1) if you pass a certain cutoff score you are approved for what you applied
for (credit card, mortgage, etc.)
2) if you did not pass the cutoff score but are within some range and meet
certain requisites you might get approved
but with a higher interest rate
3) if you are in the top scores you might even get offer a lower interest
rate
These models are also used in collections, account maintenance (increasing your
credit line), cross-selling, and relationship management.
Financial institutions manage the risk in their portfolio and customers get
different interest rates.
For a foreigner with no credit history this seems a bit unfair, but after you
are part of the system and you know how to use it (pay on time, manage your
loans), you will start getting offers for higher credit limits and lower
interest rates.
I am biased to the topic since I developed scorecards for Citibank-Colombia
(credit bureaus are used outside the states also), and now work as a consultant
developing models.
Hope this help.
Hermann E Schwyn
Manager, Modeling and Analysis
Karma Group
(954) 341-6488
hermann.schwyn_at_karma-group.com
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Received on Tue Nov 12 2002 - 22:52:10 PST
