Credit scoring is a statistical analysis of each individual's circumstances to determine the credit worthiness of a person applying for credit. Your credit score is based on information received and sourced by credit bureaus.
Most banks, credit unions, mortgage companies, credit card companies and other lenders use credit scoring to determine your credit worthiness. Credit scoring systems are used to evaluate possible risk and loss determining on the criteria within your credit bureau report. Lenders determine whether to approve a loan, condition it, or deny credit. This scoring system also, in most cases, determines your rate of interest and credit limits. Authorizing credit or denying credit is supposedly implemented by a tested and trusted system. Note, I said a supposedly tested and trusted system.
Other companies use credit scoring also, such as insurance companies, employers, landlords and government departments.
The most used credit scoring system is FICO developed by Fair Isaac Corporation. Mortgage lenders use this system to determine the possibility of default by the borrower. All credit bureaus have a credit scoring system. Equifax, ScorePower, Experian Plus and Transunion all use some system. As I said earlier the most popular is FICO. Also some lenders including credit card companies have developed their own credit scoring models.
I personally believe the development of a scoring system was the beginning of the end in sound lending practices. As a 40 year veteran of the financial world I predicted long ago this system was not accurate and was discriminatory. The system was developed to make credit granting fair for all based on a score. I believe it did just the opposite.
I fought the system while I was working and continue to this day believe it is part of the reason our financial system failed. I always believed determining credit approvals by a scoring number was wrong. There are just to many variables in credit lending to put a number on an individual borrower. My experiences and the records I used to keep showed that the proper training of Loan officers to determine credits far exceeded any credit scoring system in regards to future success of the borrower.
Most banks, credit unions, mortgage companies, credit card companies and other lenders use credit scoring to determine your credit worthiness. Credit scoring systems are used to evaluate possible risk and loss determining on the criteria within your credit bureau report. Lenders determine whether to approve a loan, condition it, or deny credit. This scoring system also, in most cases, determines your rate of interest and credit limits. Authorizing credit or denying credit is supposedly implemented by a tested and trusted system. Note, I said a supposedly tested and trusted system.
Other companies use credit scoring also, such as insurance companies, employers, landlords and government departments.
The most used credit scoring system is FICO developed by Fair Isaac Corporation. Mortgage lenders use this system to determine the possibility of default by the borrower. All credit bureaus have a credit scoring system. Equifax, ScorePower, Experian Plus and Transunion all use some system. As I said earlier the most popular is FICO. Also some lenders including credit card companies have developed their own credit scoring models.
I personally believe the development of a scoring system was the beginning of the end in sound lending practices. As a 40 year veteran of the financial world I predicted long ago this system was not accurate and was discriminatory. The system was developed to make credit granting fair for all based on a score. I believe it did just the opposite.
I fought the system while I was working and continue to this day believe it is part of the reason our financial system failed. I always believed determining credit approvals by a scoring number was wrong. There are just to many variables in credit lending to put a number on an individual borrower. My experiences and the records I used to keep showed that the proper training of Loan officers to determine credits far exceeded any credit scoring system in regards to future success of the borrower.
Years ago, most lenders were well trained on the basics of credit. I believe credit scoring took the common sense and good judgement out of lending. I found as time went on it was mainly; "what is the customers credit score" to determine whether a loan was approved or not. Most of all the proven fundamentals of credit determining went by the wayside.
Credit scoring eventually determined what rate borrowers are charged. I have always felt this was discriminatory also. This was the beginning of sub-prime lending. Today's culprit of the mortgage industry. The lower the score the higher the rate. My theory was if you approved a loan because you are getting a higher rate, the loan should probably not be made. You could charge a rate of any excessive amount of interest, but if the borrower does not make his payments your fooling yourself. You will have a loss if the basics of credit are overlooked because of a higher interest rate charged based on a credit score.
Another source of the credit problem is adjustable rate loans. The number one factor of credit is can the borrower pay you. Number ONE! The borrower may be the most honest individual on the planet, but if he does not have the means he can't pay. It is that simple. Adjustable rate loans can change the number one factor if the rate changes on a ARL and increases his/her payment dramatically. But, this is another issue I may write about later.
There are many other factors in America's financial decline. Such as disparity of income, Wall Streets obsession with quarterly earning, deregulation and more. Credit scoring is just one of them and the beginning of the decline of credit standards.
Ray Beaufait
Credit scoring eventually determined what rate borrowers are charged. I have always felt this was discriminatory also. This was the beginning of sub-prime lending. Today's culprit of the mortgage industry. The lower the score the higher the rate. My theory was if you approved a loan because you are getting a higher rate, the loan should probably not be made. You could charge a rate of any excessive amount of interest, but if the borrower does not make his payments your fooling yourself. You will have a loss if the basics of credit are overlooked because of a higher interest rate charged based on a credit score.
Another source of the credit problem is adjustable rate loans. The number one factor of credit is can the borrower pay you. Number ONE! The borrower may be the most honest individual on the planet, but if he does not have the means he can't pay. It is that simple. Adjustable rate loans can change the number one factor if the rate changes on a ARL and increases his/her payment dramatically. But, this is another issue I may write about later.
There are many other factors in America's financial decline. Such as disparity of income, Wall Streets obsession with quarterly earning, deregulation and more. Credit scoring is just one of them and the beginning of the decline of credit standards.
Ray Beaufait
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