Tweet
This is drawn from my experience in the financial services industry. Please add your own relevant comment as relevant.
First, with all due respect, I believe that the majority of consumers do not understand their credit report. If I say anything that violates what you consider to be the gospel, please speak up and share your sources.
There are two (2) types of organizations: for-profit and non-profit organizations. I will keep the discussion limited to for-profit org's.
The purpose of a business is to generate profit. The way to make profit is to use statistically significant predictors to predict a consumer's future behaviour. If you know exactly what people will do, you can optimise your business with them to maximise your profit.
Keep in mind that every business may potentially screen your credit, not just lenders. Companies in the insurance, rental, and utility industry come to mind. Not all of them will disclose the fact that they're screening your credit so assume they all do.
The other thing is that people don't understand their credit score as available from Trans Untion (TUC), Experian (EXP), and Equifax (EQU). Why do you think that 3 companies have differen scores for the same person?
Here's how your credit score is determined in a nutshell:
1) All available data on you is aggregated. I mean all. This includes all your past transactions, criminal history, income, rental history, driving history, race, gender, ethnicity, sexual orientation, etc. Everything you can possibly think of.
Some of these metrics are illegal to use, e.g. race, gender, etc., so they won't disclose that they're monitoring that. But rest assured that companies look at everything they can get their hands on.
Companies typically have several versions reports on the same person: one for the consumer's eyes, one to share with other companies, one for interal use, etc.
The version submitted to the consumer has been pruned in compliance with law.
When you do business with any company, they can potentially order a complete personal profile on you. From that profile they will apply multiple credit profile analysis algorithm to determine the risk in doing business with you, and thereby maximising profitability.
I think that consumers also misunderstand the analysis of their credit score. Simply put, different companies have different customer personal they prefer to keep as customers.
For example, a rental company would like to have a person who makes payment reliably and does not have a bad insurance history. A credit card company, however, would much prefer a person who misses payment once in a while so that the interest may be raised.
Also, a mortgage lender may prefer a borrower who is more likely to default if the down payment is large so that the bank can foreclose and sell at a profit. An car insurance company prefers responsible people who drive well and make fewer claims.
As you can see, different companies analyse the same person differently.
When your credit profile is analysed, it's quite complex. Your raw data is analysed by computer using many algorithms. The particular algorithm is protected trade secret. I suspect that many companies employ illegal metrics under the guise of trade secret, but they're very protective of their profiling algorithm so nobody knows.
What's published in your credit report isn't the complete picture.
I think the biggest mistake would be to assume that you can do any certain thing to boost your credit score. As a statistician, you know that if you have an equation with many variables, changing an unknown number of variables and analysing the output doesn't give you statistically significant results.
The only way to know for sure is to have the company release their scoring model, but as said above, their entire livelihood rests on the fact that consumers don't understand how credit is rated.
Notwithstanding the above, what improves the score for one person may not translate for another person. But what's more perplexing is that a higher credit score doesn't necessarily net you the best deal because some companies prefer consumers in a certain tier.
I would respectfully challenge anybody who maintains that they can tweak certain variables to improve their credit score. How do you know that what you did actually affected the score, or was it something else that happened since the credit bureaus do not tell you how they derive the score?
There is too much confoundment to deduce a statistically significant conclusion that doing X will improve a person's credit score. Plus why is a higher score necessarily a good thing for the type of business you're seeking?
In light of the evidence submitted above, the only logical conclusion I can deduce is to reduce debt, increase income, and honour all your contractual agreements as required by law.
First, with all due respect, I believe that the majority of consumers do not understand their credit report. If I say anything that violates what you consider to be the gospel, please speak up and share your sources.
There are two (2) types of organizations: for-profit and non-profit organizations. I will keep the discussion limited to for-profit org's.
The purpose of a business is to generate profit. The way to make profit is to use statistically significant predictors to predict a consumer's future behaviour. If you know exactly what people will do, you can optimise your business with them to maximise your profit.
Keep in mind that every business may potentially screen your credit, not just lenders. Companies in the insurance, rental, and utility industry come to mind. Not all of them will disclose the fact that they're screening your credit so assume they all do.
The other thing is that people don't understand their credit score as available from Trans Untion (TUC), Experian (EXP), and Equifax (EQU). Why do you think that 3 companies have differen scores for the same person?
Here's how your credit score is determined in a nutshell:
1) All available data on you is aggregated. I mean all. This includes all your past transactions, criminal history, income, rental history, driving history, race, gender, ethnicity, sexual orientation, etc. Everything you can possibly think of.
Some of these metrics are illegal to use, e.g. race, gender, etc., so they won't disclose that they're monitoring that. But rest assured that companies look at everything they can get their hands on.
Companies typically have several versions reports on the same person: one for the consumer's eyes, one to share with other companies, one for interal use, etc.
The version submitted to the consumer has been pruned in compliance with law.
When you do business with any company, they can potentially order a complete personal profile on you. From that profile they will apply multiple credit profile analysis algorithm to determine the risk in doing business with you, and thereby maximising profitability.
I think that consumers also misunderstand the analysis of their credit score. Simply put, different companies have different customer personal they prefer to keep as customers.
For example, a rental company would like to have a person who makes payment reliably and does not have a bad insurance history. A credit card company, however, would much prefer a person who misses payment once in a while so that the interest may be raised.
Also, a mortgage lender may prefer a borrower who is more likely to default if the down payment is large so that the bank can foreclose and sell at a profit. An car insurance company prefers responsible people who drive well and make fewer claims.
As you can see, different companies analyse the same person differently.
When your credit profile is analysed, it's quite complex. Your raw data is analysed by computer using many algorithms. The particular algorithm is protected trade secret. I suspect that many companies employ illegal metrics under the guise of trade secret, but they're very protective of their profiling algorithm so nobody knows.
What's published in your credit report isn't the complete picture.
I think the biggest mistake would be to assume that you can do any certain thing to boost your credit score. As a statistician, you know that if you have an equation with many variables, changing an unknown number of variables and analysing the output doesn't give you statistically significant results.
The only way to know for sure is to have the company release their scoring model, but as said above, their entire livelihood rests on the fact that consumers don't understand how credit is rated.
Notwithstanding the above, what improves the score for one person may not translate for another person. But what's more perplexing is that a higher credit score doesn't necessarily net you the best deal because some companies prefer consumers in a certain tier.
I would respectfully challenge anybody who maintains that they can tweak certain variables to improve their credit score. How do you know that what you did actually affected the score, or was it something else that happened since the credit bureaus do not tell you how they derive the score?
There is too much confoundment to deduce a statistically significant conclusion that doing X will improve a person's credit score. Plus why is a higher score necessarily a good thing for the type of business you're seeking?
In light of the evidence submitted above, the only logical conclusion I can deduce is to reduce debt, increase income, and honour all your contractual agreements as required by law.
Comment