Americans argue that since the interest rate pays the risk taken by the lender, it makes perfect sense to adapt the terms of the loan to the risk actually incurred by the institution.
The credit score is an accounting score awarded by specialized rating agencies, intended to assess the creditworthiness of a potential borrower. This “prior” risk measure is carried out on the basis of information collected during each financial transaction and then analyzed statistically.
In force in the United States for forty years, it is attached to the social security number of each person and is a real “financial record” that follows Americans throughout their lives.
The evaluation is based on a methodology specific to each rating agency. Each of them uses their own statistical tools to determine the outcome.
The information thus collected constitutes a hierarchical database, on which the experts carry out their statistical calculations.
All financial flows of the borrower are screened and contribute to the final result. Everything is taken into account: the number of loans made, payment incidents or overdrafts in the bank.
The formula translates into a three-figure result that varies by agency, but typically ranges from 300 to 800. The higher the number, the better the creditworthiness of the borrower and the better the terms of the borrower. rates offered by banks.
Events that degrade the rating
- Delay in paying bills. Energy suppliers (electricity, gas …) transmit information about bad payers.
- Bad situation of the bank account. This is unfavorable when the balance is often close to zero and can significantly degrade the note in case of overdraft.
- Frequent request for loans. Agencies sometimes interpret this situation as the result of repeated financial difficulties.
- Collection by the administrations.
More complex ratios are established to analyze the cash flow from the payment history of bank cards and mortgage information.
Borrower protection and access to the file
As regards the protection of borrowers, American laws do not generally go as far as in France. Nevertheless, the Fair Credit Reporting Act (FCRA) regulates the practice of the score to avoid any overflow. It gives every US citizen a right of access and rectification and prevents any discriminatory use.
The FICO Score is the most widely used rating system to date even though large US credit institutions are now developing their own statistical tool. The FICO formula is thus repeated in the United States, but also in Canada by the most important rating agencies like EX Audit or TR Agency.
In addition, some agencies like DE Audit have their own scoring model . The latter uses a larger scale, which ranges from 280 to 900, which allows a slightly more refined analysis.
Multiple uses of credit score
Improving one’s rating remains a permanent goal for Americans and for some a real necessity if they want to get a loan. For this, each citizen has access to the history of his file. But the borrower is not the only one to access his file. Many economic agents obtain FCRA approval and also access information. This is the case of insurance companies, landlords, mobile operators, but also employers.
In the context of a loan grant, the credit score is however not the only criterion of analysis, even if it remains the determining element. The result is indeed to reconcile other elements such as the level of income or the professional situation of the borrower. The quality of the commercial relationship can also be involved in the bank’s decision.
The spreads can vary from 1 to 4 depending on the borrower’s rating. In case of bad rating, the consequences can be very important and some Americans are unable to borrow for housing.