How Credit Scores Predict Your Behavior

May 25, 2013 — -- Credit scores, as with most attempts to make sense of our world, operate on the assumption that the near future will look a lot like the recent past, and that going forward, people can be expected to behave pretty much as they always have. That is, credit scores base their predictions of the future on their knowledge of the past.

To leverage this knowledge of the past with the idea of building a crystal ball view into the future, the people who build credit scores thoroughly analyze credit bureau information to understand how consumers have gotten to where they are now, and, most importantly, which of the credit bureau data can be used to predict specific future credit behavior for all consumers.

Since most people will exhibit the same behaviors, good or bad, for years at a time, it's not hard to build a scoring model that simply predicts that people with bad credit today will have bad credit tomorrow, and that people with good credit today will have good credit tomorrow. The trick in credit score building is to predict which consumers with problem histories today are most likely to turn the corner and become low risk -- and thus profitable -- for lenders in the future, as well as identifying credit applicants who may look good now, but who appear to be headed for financial trouble.

becomes the credit score representing the risk for a particular consumer.