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Credit Scoring

Credit scoring is a method of assigning point values to the various items of information included in your credit application or on your credit report. The values are then combined and a final score determined. The scoring system was devised to help creditors apply a fair standard to all loan applications, and to help them more easily determine who is less likely to repay a loan.

There are many different scoring methods. As we pointed out, not all creditors use the same system. One may look at your information and reject your request due to a low score. However, another creditor, using a different set of parameters, may score you high enough to approve your application. The credit scoring system allows a creditor to reduce costs associated with reviewing your credit application. Knowing the statistical probability of how likely the applicant is to pay his debts, a credit manager can easily determine whether or not the institution should take the risk of lending money to that applicant. By eliminating those applicants who statistically have been shown to be bad risks, credit scoring can cut down on bad debt losses and the high expenses of collecting from borrowers who are behind in their payments.

Legislation prohibits discrimination on the grounds of race, national origin, sex or marital status in granting credit. The age of an applicant cannot be scored in such a way so that it denies credit only on that basis. Likewise, simply because a person is of a particular ethnic background, is male or female, or is married, single or divorced, he or she cannot be denied credit solely for that reason. If the person possesses the financial ability to repay the loan, the institution must extend that credit to him.

Credit scoring systems are designed for creditors by specialized research firms. Old applications that were approved by the banks are reviewed. Each of the questions on the application is studied in an attempt to determine to what extent that information figured in the success or failure of a loan. The examiner assigns various point values for the different possible answers to each question. A base score is determined as the lowest value that will assure the greatest chance of successful repayment of the loan. Theoretically, no one who scored below this value on the application would be approved. Thus, if the creditor rejects all applicants who fail to score higher than the base number, there should be few, if any, failures to repay.

While creditors rely heavily on credit scoring, there is a gray area that allows a lending officer to override the score and to pass an application based upon his personal judgment in an individual case. Many creditors realize that the point scoring system may pass over credit worthy applicants, so every effort is made to fairly determine the viability of a loan before rejecting it.

If you feel that you have been denied credit because of the inherent biases of the scoring method used in reviewing your application, work with your lender to get the credit you want. Remember, he wants to extend a loan and make a profit for the bank. You must work with him to prove that you can and will repay the money that you borrow.

 


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