"Credit scoring" has been a way for lenders to figure out if a person is a good credit risk for years. Credit scoring has become a hot topic recently, in part because mortgage lenders are willing to use it to figure out how likely someone is to pay back a home mortgage refinancing loan or a second mortgage loan. Even insurance companies use credit scores as part of their underwriting process when they write policies for cars and homes.
Credit scoring is a way to figure out who is most likely to pay back a debt, like a mortgage refinancing or second mortgage loan. It is based on a statistical programme that gives points for certain things that help predict who is most likely to pay back a debt. Lenders use the total number of points, or score, to figure out if a person is creditworthy. A big random sample of customers is taken and statistically analysed to find out what kinds of things are linked to credit risk. Then, each of these factors is given a weight based on how well it predicts who will be a good credit risk.
Credit scoring models do differ from one lender to the next, but most of the time, the following things are taken into account:
- The amount of debt you have now compared to the total amount of credit you could have.
- The amount of credit checks (each time a creditor pulls credit in response to your application).
- The number of different accounts that are open.
- How long you've had credit.
- Collection actions, such as judgments, repossessions, foreclosures, and bankruptcies
- A record of how much you've paid on your current and past accounts.
Lenders use the statistical programme to compare this information about you to how other people with similar profiles have done with their credit. Since it is based on real data and statistics, it is usually more reliable than a subjective or value-based decision. Even though it may seem impersonal, when credit scoring is used correctly, it can help lenders make decisions about credit applications faster and more accurately than an individual could.
The credit score model has also made the process of refinancing a mortgage or getting a second mortgage loan shorter. This is because mortgage lenders can now make decisions more quickly.
