The Benefits of Credit Scoring
TweetCreditors, whether they be banks, auto dealers, credit card companies or mortgage lenders, are faced with the difficult task of predicting who will pay them back and who will not. These creditors are faced with two potential errors in their judgment: lending money to someone who won't pay them back, and not lending money to someone who would have paid them back. Both scenarios can lead to some serious long-term consequences. Credit scoring helps improve these two issues as well as provides other benefits, mostly for the consumer.
People can get loans faster
Scores are typically delivered on the spot, enabling lenders to expedite loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's "score cutoff". Scoring also allows retail stores, Internet sites and other lenders to make "instant credit" decisions.
Credit decisions are fairer
Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like gender, race, religion, nationality and marital status are not considered by credit scoring.
Poor status counts for less
If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and recent good payment patterns show up on your credit report. Unlike so-called "knock out rules" that turn down borrowers based solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report. More credit is available.
Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for "automatic approval" benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.
Credit rates are lower overall
With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses using scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information - including credit scores - available to lenders here. Knowing and improving your score can also lead to more favorable interest rates.
