How Are Credit Scores Built?

I’ve written enough articles about what makes your scores go down to choke a shredder.
It’s about time for one about how those scores are actually built. Rather than getting too
technical, I’ll keep it simple.

Credit scoring systems are not random and are not influenced by “common sense.”
They are built using statistical methods such as Logistic Regression and are tested
using statistical measurements such as Kolmogorov Smirnov testing. I throw that out
there not to impress you with hard to pronounce phrases but to hopefully convince you
that credit scoring models aren’t built using the MacGyver Model (toothpicks and bubble

Step one when you’re building a credit scoring system is to determine what you want
it to do. That’s called a Performance Definition, which is the stated design objective.
FICO, for example, is designed to predict the likelihood of a consumer paying 90 days
late or worse in the 24 months after the score has been calculated.

Step two is to select your development sample. Since we’re talking credit scores it’s
necessary to select a sample of credit reports. FICO uses millions of credit reports as a
sample on which to build their scoring models.

Step three is the development of the scorecards that will make up the scoring system.
A scorecard is actually a credit-scoring model built to evaluate risk for a unique or
homogenous population. Most scoring systems have multiple scorecards.

Step four is the installation of the scoring system. FICO scores are installed at each of
the three U.S and both Canadian credit reporting agencies. The credit bureaus have a
licenses to use FICO’s models to calculate credit scores on their credit files.

Step five is the multi-step process of testing (Q&A), moving the model into production
and then marketing the new scoring system. This five step process is clearly much more
involved and takes anywhere from 12 to 24 months to complete. Once it’s done all you

have to do is convince the entire credit industry that they should use it.

“The Credit Guru”, Longtime FICO Insider & Credit Industry Authority President Of The Ulzheimer Group, LLC
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group, the Director of Credit Education at DisputeSuite.com, Credit Expert at CreditSesame.com and the credit blogger for Mint.com. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 150 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

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