Lecture Notes: Credit Scoring


Credit Scoring


* Why do we have credit reports and credit scores?

* What is in a credit report?
article says four types of information
1) identity (name, address, SS#)
2) individual's use of credit based products, sometimes other bills
3) list of past inquiries
4) public records related to individual's finances

* What is a credit score?
  each institution creates a score, and there are also other institutions with formulas (FICO)
  
  
Who will request your credit score?
- prospective lenders
- requests for credit
- landlord
- employer

* how can you request your credit report?
  annualcreditreport.com
  
* How is a credit score calculated?  
   typically range from 350 to 800
   - payment history
   - debt to equity
   - length of credit history
   - amount of credit extended
   - recent transactions
   
* what things ought to be in your score? what should not?
   - race? genetics? age? gender?

* why not just charge everyone the same?
  


*What data does this paper use?
 - TransUnion anonymous sample of 25 million borrowers from 1999-2004
 - aggregated to county level
 - compare to Census data, aggregated to county level (
* How does credit vary by geography?
 

FINDINGS

A) consumer credit scores vary widely by county, with the south having the lowest scores
* why does the South have such low credit scores?
 
B)  Weak county scores getting weaker and strong county scores getting stronger
  * is this causation? Argument that low score means higher payments...means harder to make payments...
  * what is the "universal default policy" for a credit card?
    - card raises rate if they observe recent missed payment on another line of credit

C) counties with more minorities have lower average credit scores
  * the article mentions that redlining is no longer legal--what is redlining?
  * article claims scores are more fair than measures in the past? do you agree?
  * does this mean credit scores are racially biased? 
  Note that there is some research that shows that people who understand credit scores will raise them?
  * is it an education problem?
  
D) High homeownership and high income associated with higher credit scores
   * do you believe the gatekeeper story in the article? (you get the better job or home if your credit score is higher)
   
E) Financial insecurity (delinquencies) are rising over time
   * why do you think this is? do you think this has continued?
   * extension of too much credit?
   quantity of revolving debt doubled! around $9,000 in 2004

   
Questions that are raised (and how might we try to answer them)?

* are their negative consequences for not knowing your credit score?
* at what point do high prices for low credit scores become price gouging?
* why are credit scores particularly low in the South?
* is this another reason for financial education initiatives?
   Only 56% of low education and 64% of low income knew credit score weakened by missed credit card payment
   * All sorts of ads and credit counseling, plenty of information...what's the underlying problem?
* should we have more legal requirements for credit bureau's (some new requirements in Fair Credit Reporting Act)
   free report every 12 months

Your questions:

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