Beacon Score

Beacon score - is a credit score made by the Equifax Credit Bureau. It predicts the likelihood that an existing account or potential credit customer will become a serious credit risk within 24 months after scoring. Beacon score helps to identify credit risks like bankruptcies, repossessions, loan defaults, and delinquencies. It is used to evaluate creditworthiness.

Credit score definition

The credit score is a numerical representation of information on an individual's credit reports. It reflects the credit risk, or worthiness, of a consumer or business based on a statistical analysis of the credit profile of that individual or entity.

There are many credit scores. Every score is based on an algorithm developed by the credit bureau. Each bureau can have varied information on the same consumer's credit history. When a creditor reports information to a bureau, the creditor is charged a fee for updating the report. Many smaller creditors, looking to cut costs, will choose to report only to one or two of the most common bureaus.

Beacon score factors

As beacon score and other similar tools are calculated with algorithms, some factors form the final score:

• 35% of score

The biggest part of the score is payment history. This data provide information about paying bills on time by the client and if he has been through bankruptcies, consumer proposals or debt management plans.

• 30% of score

Another big part of creditworthiness is based on how much the client owns. For example, if the client carries an $8,000 balance on a credit card with a $10,000 limit and pays the minimum on time each month, his credit score drops. It pays to keep balances down and not get close to the credit limits.

• 15% of score

This part of the score is based on how long the client's accounts have been open and used. To be seen as good credit risk, it is not enough to be approved for credit. It is good to use the given credit.

• 10% of score

Another 10 percent of credit score depends on the balance between revolving credit such as credit cards and installment loans such as mortgages.

• 10% of score

The remaining part of the score is based on the new credit, the client has applied for. It should not be too high a percentage of all the credit shown on the client's file.

Value of score

Generally, the higher the score, the better. Each lender makes a decision based on own criteria. The value of an acceptable score depends on how much risk the lender wants to take and how much profit it thinks it can make with a given blend of customers. The credit score is usually only one factor in the lending decision. Although scores typically have a big influence, a lender might decide that other factors are more important. National distribution chart of credit scores shows that more than half of the U. S. population has a score of 700 or higher. Many lenders use 720 or 740 as the cutoff result for giving borrowers the credit.

Examples of Beacon Score

• A Beacon score of 600 or higher is considered to be a good credit score. This means the individual has a good credit history and is likely to be approved for credit.
• A Beacon score of 550 to 649 is considered to be an average credit score. This means the individual has a fair credit history, but may have some blemishes in their credit past.
• A Beacon score of 500 to 549 is considered to be a poor credit score. This means the individual has a bad credit history and may be denied credit or be charged a higher interest rate.
• A Beacon score of below 500 is considered to be a very poor credit score. This means the individual has a very bad credit history and is likely to be denied credit.

Advantages of Beacon Score

The Beacon Score is a valuable tool that helps lenders to accurately assess the creditworthiness of potential or existing customers. Here are the main advantages of using the Beacon Score:

• It provides an accurate assessment of the creditworthiness of customers, allowing lenders to make informed decisions about lending money.
• It helps to identify credit risks such as bankruptcies, repossessions, loan defaults and delinquencies.
• It is highly predictive, allowing lenders to estimate the likelihood that an existing account or potential credit customer will become a serious credit risk within 24 months after scoring.
• It is a cost-effective solution for lenders, since it requires minimal manual effort and a relatively low cost to obtain the score.
• It is easy to use and understand, allowing lenders to quickly evaluate creditworthiness.

Limitations of Beacon Score

• The Beacon Score is not always an accurate representation of an individual’s creditworthiness as it does not take into account other factors such as income, employment, and debt-to-income ratio.
• The score does not take into account any debts that have been paid off, which could improve the credit score.
• The score is not always updated in a timely manner, which could lead to an inaccurate score being reported.
• The score can be affected by errors on credit reports, which could lead to an incorrect score.
• It is not possible to obtain the exact Beacon Score, only a range of scores is given.
• The Beacon Score does not take into account any non-traditional forms of credit, such as rental payment history or utility payments.

Other approaches related to Beacon Score

A Beacon Score is a credit score made by the Equifax Credit Bureau, which predicts the likelihood that a customer will become a serious credit risk within 24 months. There are other approaches used to evaluate creditworthiness for an individual or business. These include:

• Credit reports, which provide a comprehensive look at a person's or company's credit histories. These reports list past payments, lines of credit, bankruptcies, and other loan information.
• Credit scores, which are numeric values that indicate a person's creditworthiness. They are typically generated by the three major credit bureaus and range from 300 to 850.
• Credit utilization, which is the ratio between a person's outstanding credit balances and their total credit limit. This is an important factor in determining an individual's creditworthiness.
• Debt-to-income ratio, which is the ratio between a person's total monthly debt payments and their income. A higher debt-to-income ratio indicates a higher risk of defaulting on loans.

In conclusion, while the Beacon Score is an important tool used to evaluate creditworthiness, other approaches may be used to assess the creditworthiness of an individual or business. These include credit reports, credit scores, credit utilization, and debt-to-income ratio.

Footnotes

Beacon Score — recommended articles

Doubtful account — Credit Review — Aging receivables — Accounts Receivable Aging — Payables turnover — Average collection period — Aging schedule — Comparative statements — Average payment period

References

• Beacon (1998), Equifax Inc., Canada
• Becker T. (2011), Credit score power, iUniverse Inc., United States
• Mays E. (2001), Handbook of credit scoring, Glenlake Publishing Company Ltd., Chicago, United States
• Roseman E. (2010), Here's how credit score sets your loan rate, Toronto Star, Canada
• Weston L. (2012), Your Credit Score. How to improve the 3-digit number that shapes your financial future, Pearson Education Inc., United States

Author: Anna Marzec