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.