A credit score represents a borrower's creditworthiness and likelihood of repaying debts. It is based on credit report information and used by lenders to evaluate lending risks and determine loan qualifications. The FICO score, ranging from 350 to 850, is the most commonly used credit score. Lenders set credit standards including credit score minimums, current ratios, debt ratios, and debt coverage ratios to evaluate loan applications.
A credit score represents a borrower's creditworthiness and likelihood of repaying debts. It is based on credit report information and used by lenders to evaluate lending risks and determine loan qualifications. The FICO score, ranging from 350 to 850, is the most commonly used credit score. Lenders set credit standards including credit score minimums, current ratios, debt ratios, and debt coverage ratios to evaluate loan applications.
A credit score represents a borrower's creditworthiness and likelihood of repaying debts. It is based on credit report information and used by lenders to evaluate lending risks and determine loan qualifications. The FICO score, ranging from 350 to 850, is the most commonly used credit score. Lenders set credit standards including credit score minimums, current ratios, debt ratios, and debt coverage ratios to evaluate loan applications.
A credit score represents a borrower's creditworthiness and likelihood of repaying debts. It is based on credit report information and used by lenders to evaluate lending risks and determine loan qualifications. The FICO score, ranging from 350 to 850, is the most commonly used credit score. Lenders set credit standards including credit score minimums, current ratios, debt ratios, and debt coverage ratios to evaluate loan applications.
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Slide Show #12
Credit Scoring and
Scorecard Lending AGEC 489/690 Spring 2009 Credit Scoring Fundamentals A credit score is a numerical expression based on a statistical analysis of a borrower’s credit history to represent his/her creditworthiness, creditworthiness which is the likelihood that the borrower will pay his/her debts in a timely manner.
A credit score is primarily based on credit report
information obtained from credit bureaus and credit reference agencies. Credit Scoring Fundamentals Lenders use credit scores to evaluate the potential risk posed by lending money and to mitigate losses due to bad debt. Lenders also use credit scores to determine who qualifies for a loan, at what interest, and what credit limits. limits
Credit scoring is not limited to lending. Other
organizations, such as mobile phone companies, insurance companies, and potential employers are examples of other users of credit scoring. Fundamentals Credit Scoring A credit score is primarily based on credit report information typically from the three credit bureaus: Experian, TransUnion and Equifax.
There are differing approaches to calculating
credit scores. The FICO is a credit score developed by Fair Issac & Company. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the lender. Fundamentals of a Credit Report 1. Personal identifying information – your name, address, social security number, birth date, current and previous employers.
2. Credit history – this includes your bill-paying
history with banks, retail stores and others who have granted you credit. Information includes each account you have (when opened, type of account, how much credit it includes and amount used, your monthly payment. It will indicate when loan was paid off and if there were missed or late payments.
3. Public records – information that might indicate
your creditworthiness, such as tax liens, court judgments and bankruptcies. The TheFICO FICOcredit creditscore scoreisisused usedby byall allthree threecredit creditbureaus. bureaus. ItItisis used usedbybyover over90% 90%of ofcommercial commercialbanks bankswhenwhenanalyzing analyzingmortgage mortgage loan loanapplications. applications. Credit Score Lending Practice
4.467 4.467%% risk riskpremium premium Scorecard Lending Credit Standards Most lenders use credit scores as a part of its standards when evaluating loan applications. They will also establish standards related to liquidity, solvency and debt repayment capacity (minimum current ratio of 1.50, maximum debt ratio of 0.50, minimum term debt and capital lease coverage ratio of 1.0). Lenders also focus on the “Six C’s” of assessing a borrower’s creditworthiness. Six C’s to Assessing Creditworthiness Hypothetical Scorecard Weight Met Standard
1. Credit score from credit bureau15% ________
2. Current ratio 15% ________ 3. Debt ratio 20% ________ 4. Debt coverage ratio 30% ________ 5. Other factors 10% ________ a. Continuing customer b. Primary commodity c. External control factors TOTAL SCORE ________ The lender then decides the minimum score for automatic approval, automatic rejection, and range over which additional conditions must be met (risk premium, additional collateral, compensating balances, etc. Hypothetical Scorecard Weight Met Standard
1. Credit score from credit bureau15% __12____
2. Current ratio 15% __13____ 3. Debt ratio 20% __17____ 4. Debt coverage ratio 30% __25____ 5. Other factors 10% ___9____ a. Continuing customer b. Primary commodity c. External control factors TOTAL SCORE __76____ The lender then decides the minimum score for automatic approval, automatic rejection, and range over which additional conditions must be met (risk premium, additional collateral, compensating balances, etc. Credit Score Lending Sheet
