Credit Scoring - The insiders guide

The Credit Assessment Process

When assessing your credit worthiness, there are three major cornerstones that underpin the whole process.

• 1. The Credit Score. This a single measure of a borrower's creditworthiness, based on the information available to the lender. The score reflects the likelihood of the borrower's performance being 'good' over a given period of time: usually 6 months to 2 years. The higher the borrower scores, then the more likely his/her performance will be 'good'. To be classified as 'good', it helps if the applicant has a similar profile to those people who the lender has previously found to be good.
• 2. Policy Rules. Each lender has its own, which include a definition of how the credit score will be used and what decision to make based on that score. It will define at what point they will accept an application, decline it or refer it to an underwriter for a manual assessment. Other policy rules may override the credit score, for example rules that are in place for anti-money laundering or fraud prevention. Another rule could mean that they decline a card application if the borrower already has a card from one of the company's other brands. These rules often take precedence over the credit scoring
• 3. Referrals to underwriters. If a scorecard is not allowed to make an automated decision or if a policy rule is triggered, then the application will be referred to an underwriter for a manual decision to be made.

These three cornerstones form the basis of the decision to accept or decline an application. Only after this decision has been made will the lender then select which product to offer (if there is a choice of product) and decide what is an appropriate credit limit to offer. It is at this stage that income and salary will most often be taken into account. Normally the product selection and the assignment of a credit limit are based on combining the credit score with income and salary information. As a general rule, the better the credit score, then a higher proportion of your income/salary will be offered as a credit limit.

There are actually two types of credit score that a lender might use. An 'application' credit score is used when a new customer applies for a product and it is based on information from the application form and the CRA. A 'behavioural' credit score may be used when you already have products from a financial institution, in which case the lender can use performance and transactions on those products to assess how you are handling your existing credit facilities. Existing customers applying for new products can be subject to a hybrid score that uses both application and behavioural data and techniques.

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