|
For years, lenders have utilized "credit scoring" to determine
whether or not an individual is a good credit risk. Credit
scoring has recently become a hot topic, due in large part by
the mortgage lending industry's willingness to use the process
to evaluate one's likelihood of repaying home mortgage
refinancing or second mortgage loans. Even insurance companies
use credit scoring as part of their underwriting procedure when
writing automobile and home insurance coverage.
Credit scoring is a system, based on a statistical program,
which awards points for certain factors that help predict who is
most likely to repay a debt, such as a mortgage refinancing or
second mortgage loan. The total number of points, or score, is
what lenders use to determine an individual's creditworthiness.
A large random sample of customers is taken, and analyzed
statistically to identify characteristics relating to credit
risk. These factors are then given a weight based upon how
strong a predictor they are of who would be a good credit risk.
Credit scoring models do vary from lender to lender, but most
generally include the following factors:
1) Your current amount of debt as compared to your potential
total available credit
2) Payment history on current and previous accounts
3) The length of your credit history
4) The number of credit inquiries (each time a creditor pulls
credit in response to your application)
5) The number of separate open accounts
6) Collection actions including judgments, repossessions,
foreclosures, and bankruptcies
Using the statistical program, lenders compare this information
about you to the credit performance of other consumers with
similar profiles. Therefore, it is usually more reliable than a
subjective or judgmental decision, because it is based on real
data and statistics. Although it may seem somewhat impersonal,
when used properly, credit scoring can allow creditors to
evaluate credit applications faster and more accurately than
individuals, in an impartial and unbiased manner.
In addition, the home mortgage refinancing and second mortgage
loan process has been shortened as a result of the speed in
which mortgage lenders can now make decisions utilizing the
credit score model.
|
