Credit Scoring and Automated Underwriting?

To compute a credit score, a model is used containing a list of questions, with a certain number of points given for each answer. Only information proven to be predictive of future credit performance is used in a model. By summarizing factors obtained from a credit report and credit application, lenders will have a quick but reliable handle on the likelihood of a borrower repaying on time.

To build a scoring model, developers analyze historical data on the performance of previously made loans to determine which borrower characteristics are useful in predicting loan performance. A well-designed model should give a higher percentage of high scores to borrowers whose loans will perform well and a higher percentage of low scores to borrowers whose loans won't perform well. But no model is perfect, and some bad accounts could receive higher scores than some good accounts.

Some of the factors that determine scores are:

• Payment History-How borrowers paid their bills in the past can give lenders an indication of how they will pay in the future.
• Credit History-How long borrowers have had and successfully managed credit.
• Outstanding Debt-How much credit borrowers have and how much they have used.
• Credit Inquiries-How many times borrowers have authorized lenders to check their credit report. Sometimes, having many inquiries within a time period indicates that credit usage may be increasing and creates an additional level of risk.
• Types of Credit-Do borrowers have a mixture of types of credit, such as credit cards, personal loans, etc.?

Factors that cannot be considered in determining credit scores are:

• Race
• Gender
• Religion
• National Origin
• Marital Status
• Where borrowers live

Having established credit, paying bills on time and keeping balances to a moderate level will help ensure a strong credit history and a good score. Remember, credit scores are intended to help lenders make faster and more consistent decisions, such as whether to approve a loan application or to raise a cardholder's credit limit. A company using credit scoring has to decide for itself which scores are "good" and which are "not so good." The score is a tool, not a recommendation; the lender should make the decision.