To facilitate decision-making in loan granting, banks and credit organizations increasingly use “credit scoring.” This tool allows for the assessment of the risk of non-repayment based on qualitative and quantitative data collected beforehand.
What is “credit scoring”?
Developed about twenty years ago, “credit scoring” was designed to help banks sort through credit application files using a pre-established framework. Concretely, it is a questionnaire that helps define the borrower’s profile. This form seeks to gather all relevant information about the borrower, such as their civil status, marital status, professional life, income, assets, etc.
This information allows the bank to quickly determine if their client is among those at risk in terms of credit. The score obtained by the borrower from the questionnaire information will determine whether it is possible to grant them the credit they are requesting or not.
Use of “credit scoring” by lending companies
The main concern of a credit organization is to know if their client is capable of repaying their installments. Therefore, they must avoid granting a loan to someone who might not meet the deadlines by establishing the profile of defaulting borrowers. To do this, they use their own statistics (in the case of large banks and major financial institutions) or purchase databases from specialized companies (in the case of small banks).
The bank then creates a questionnaire that includes all the information likely to determine the borrower’s profile, assigning different points for each answer. Even though the basic principle is the same, each type of credit often has its own questionnaire and scoring system. The borrower receives a score for each of their answers. The banker simply needs to calculate the client’s total score to determine if they are among those at risk in terms of credit or not, in order to consider granting or denying the loan.