Benefits of Credit Scoring

Credit scoring is the use of the knowledge of the performance and characteristics of past loans to predict the performance of future loans. Credit scoring has some obvious benefits that have led to its increasing use in loan evaluation.

Benefits of Credit Scoring

So what's the big deal? The widespread use of credit scoring allows for speedy, objective analysis of credit histories.

Credit scoring has allowed companies to offer "instant credit," which was unheard of in years past. As you browse through aisles of washing machines or peek into the windows of new cars, a prospective lender can order your score and, if they like what they see, give you loan or credit approval on the spot.

It also means that borrowers are less likely to experience problems with individual lenders' prejudices since it does not take into consideration race, gender, religion, national origin, marital status and whether or not the applicant is receiving public assistance.

Because credit scoring is objective and based on large volumes of verified statistical data, credit scoring brings a new level of fairness to the credit-granting process.

Credit scoring offers the following benefits:

Fast Credit Approval
Coupled with fast computer systems, each application for new credit can be scored and evaluated in seconds. For example, credit scoring has allowed companies to offer "instant credit," which was unheard of in years past.
Accuracy
Factors involved in any credit score are considered using a uniform process, eliminating human error and bias. Your race, age and gender don't impact your credit score, just your credit history.
Consistency
Since credit scoring analyzes each customer's credit history using the same statistical formula, there is a consistency in the way a company evaluates customers across the country.
Explicitness
With credit scoring, the exact process used to predict risk is known and can be communicated. Subjective scoring, on the other hand, depends on avague process that even its users sometimes cannot explain.
Reduced Bad Debts
Credit scoring allows lenders to more accurately predict which new customers will end up being high-risk, lowering the overall cost of doing business.
Reduced Operating Costs
Faster, cheaper and better credit scoring means lower costs for businesses and better rates for consumers.