Understanding Credit Scores

Customer Tutorial

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Important Legal Note

The information in this presentation is not to be relied upon, is not
intended to be, nor should it be used or construed as, legal advice.
Equifax assumes no liability for any errors or omissions in the
information in this presentation. Compliance with the Fair Credit
Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA) or their
respective regulations is the responsibility of each entity to which such
laws apply. All specific consumer, customer and other third-party
information in this presentation is fictitious.
This presentation contains Equifax proprietary and confidential
information. Do not distribute or copy.

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What is Credit Scoring?

The application of statistical methods to credit data
with the intent of predicting the likelihood of some
credit-related event taking place.
Makes use of credit history information
Developed using analytically derived, demonstrably and
statistically sound statistical techniques

A credit score does not tell how an individual will

act. Rather, it tells the probability or likelihood that
the individual will act a certain way.

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Developing a Scoring Model

Commonly used terms
An Attribute (aka Characteristic or Variable)
is an aspect of an individuals credit history. Some
examples might be Age of Oldest Trade or Utilization
Rate on Open Bankcard Trades.
A Bad Definition is what the model is developed to predict.
A common bad definition for the Financial industry is 90+
Days Past Due; common bad definitions for the
Telecommunication industry are No Pay, Involuntary
Disconnect or 60+ Days Past Due.

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Developing a Scoring Model (continued)

Commonly used terms
A Performance Period is the time period for which the bad
definition applies. Financial industry scorecards are
designed to predict the likelihood of some event occurring
over the next 12-24 months. Telecommunication industry
scorecards have a performance window of 6-12 months.
The Observation Point is the point from which the model
development data was taken. It is the starting point of the
Performance Period.
A Bad Rate is the percentage of accounts that meet the
bad definition within a certain score range. Typically, bad
rates are quoted as interval or cumulative bad rates.
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Model Development
Utilizes historical information to predict future
events and outcomes
Historical
Information

Observation
Point

Prediction Time Frame

Performance Window

Dependent Variable

Independent Variables
Credit Attributes

90+ Days Past Due

No Pay

Predictive
Model

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Developing a Scoring Model

General scoring model factors
Payment History
Has there been delinquency in the recent or historical past?

Amount Owed
What are the aggregate balances? How high is the credit
utilization (balances as a percent of available credit)?

Length of Credit History

This is a proxy for stability longer history equates to
stability and often more credit information.

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Developing a Scoring Model (continued)

General scoring model factors
New Credit
Has the consumer escalated their use of credit?

Types of Credit in Use

Does the consumer have a healthy mix of credit devices?

Public Records
Publicly available information related to bankruptcies,
judgments and liens.

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Developing a Scoring Model (continued)

An example scorecard (for illustrative purposes only)
Variable (aka Characteristic or Attribute)
C onstant
Revolving Utilization

Value Range
0-30%
31-60%
61+
<6
7-12
13-20
21+
C urrent
30-59
60-89
90+
<2
2-4
5+
<80%
81+%
Yes
No
0-1
2
3+
<$2,000
$2,000-$5,000
>$5,000

Average Age of C redit File (in months)

Worst C redit Rating

Number of Open Acc ounts

Perc ent of Trades that are Satisfac tory

Presenc e of a Public Record Item?
Number of Inquiries

Bankcard Balanc e

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Points
500
41
8
-21
-18
0
12
30
5
-10
-30
-57
-18
9
19
-31
9
-31
3
12
3
-10
7
5
-12

What Factors Affect a Score?

Payment History
A record of late payments on current and past credit
accounts may lower the score.

Public Records
Matters of public record such as bankruptcies, judgments,
and lien items may lower the score.

Amount Owed
Owing too much may lower the score, especially if the
accounts are approaching the total credit limit.

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What Factors Affect a Score? (continued)

Length of Credit History
In general, a credit history that dates back for a longer
period of time is better.

New Accounts
Opening multiple new accounts in a short period of time
may lower the score.

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What Factors Affect a Score? (continued)

Inquiries
Whenever someone else, i.e. a lender, gets a credit report
an inquiry is recorded on that credit report. A large number
of recent inquiries may lower the score.

Open Accounts
The presence of too many open accounts can lower the
score, regardless of whether the accounts are being used
or not. However, closing accounts will likely cause the
utilization rate to go up which may lower the score.

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Performance Charts
Cumulative
Population

Accounts
Eliminated

Cut off score

A gains chart is a tool used to obtain an overall view of how a particular score performs on a specific population. Generally speaking,
the population is rank ordered from the lowest risk (top) to the highest risk accounts (bottom), and is then separated into equal-sized
groups.
Gains charts can be used in a variety of ways and here is an example of information that a risk model gains chart can provide:
Isolating high-risk accounts in the low level score ranges. When using risk models, this information is useful to clients who are
looking to reduce their overall portfolio delinquency rate. By referencing the Decum % of bads column, the client is able to
determine which score ranges capture the most amount of bad accounts in their portfolio. (The higher the number, the higher
percentage of bads that are isolated at or below a particular score range.) This information can then be used to drive their acquisition
strategy by allowing the client to determine which customers they wish to add to their existing customer base.

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Gains Chart Explanation

Min / Max Score: The minimum and maximum

score ranges within that specific percentile.

Goods: The population of accounts the customer is targeting

to keep (e.g., paid accounts).

Total Accounts: The number of accounts present

in the portfolio.

Bads: The population of accounts the customer is targeting to

eliminate (e.g., non-payers or 90+DPD).

Percent of Goods: A calculation that divides the summation of good accounts by the total good population.
For example, 11.86% = 23,775 / 200,533.
Decum % of Bads: A calculation that divides the summation of bad accounts by the total bad population.
For example, 43.58% = 21,239 / 48,741. Note: Calculations for this number starts from the bottom score range and filters to the top.
Interval Bad Rate: A calculation that divides the number of bads by the population within that interval.
For example, in the upper most decile the interval bad rate of 1.16 = 280 / 24,055.
Cumulative Bad Rate: A calculation that divides the summation of bad accounts by the summation of total of accounts.
For example, 2.36 = (280+847) / (24,055 + 23,746).

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Dual Score Matrix- Risk Strategy

Low Risk
Medium Risk
High Risk

A dual score matrix offers further risk segmentation. Risk based product offers can be set within each one of the
risk segments based on combinations of the General Risk Score and Bankruptcy Navigator Index 3.0 scores value.

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