Why Credit Scoring?

Why is credit scoring used?

By using credit scoring, a lender can quickly and objectively evaluate your credit history in a consistent manner, and determine the likelihood that you will repay the loan as agreed. The use of credit scores not only improves the accuracy of the analysis of your credit history, but does so in a way that enhances the efficiency and consistency of the underwriting process.

Historically, credit decisions required a skilled, human evaluation of the information in an applicant’s credit history to determine the likelihood that the applicant would repay a future loan in a timely manner. More
recently, computer models have been developed to perform such evaluations. These models produce numerical credit scores that function as a shorthand version of an applicant’s credit history to facilitate quick credit assessments.

Credit scoring also protects you. This is because your age, health, race, religion, gender, national origin, marital status, income, and employment are not considered in determining your credit score.

Risk-based pricing

Recently, the credit industry has already seen a dramatic reduction in paperwork requirements and "risk-based" pricing has become commonplace in determining the interest rate and points that we may charge on a loan. In plain English, this means that the higher one's credit scores, the less paper they will have to provide to prove that they are creditworthy and the interest rate and/or fees a borrower pays will be based on the level of their scores.

Risk-based pricing is a method of underwriting that evaluates the application risk factors and credit profile and adjusts the interest rate and possible discount points on a mortgage, up or down based on this risk evaluation. The credit score is by far the major element used to make his rate decision.