How is a credit scoring system developed?

Personal Finance February 23, 2013|Print

To develop a credit scoring system or model, a creditor or insurance company selects a random sample of its customers, or a sample of similar customers, and analyzes it statistically to identify characteristics that relate to risk.

Each of the characteristics then is assigned a weight based on how strongly it predicts who would be a good risk. Each company may use its own scoring model, different scoring models for different types of credit or insurance, or a generic model developed by a scoring company.

Under the Equal Credit Opportunity Act, a creditor’s scoring system may not use certain characteristics—for example, race, sex, marital status, national origin, or religion—as creditworthiness factors. The law allows creditors to use age in properly designed scoring systems. But any credit scoring system that includes age must give equal treatment to elderly applicants.

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