Beacon Score
| Beacon Score |
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| See also |
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[1]. 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[2].
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[3].
Beacon score factors
As beacon score and other similar tools are calculated with algorithms, some factors form the final score[4][5]:
- 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[6].
Footnotes
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
