Credit scoring is a numerical expression based on an analysis of a person’s financial documents to reflect his actual and current creditworthiness. The credit assessment is primarily based on information resulting from the creditworthiness analysis.
Banks and other financial institutions that provide loans and credits use this tool to assess potential risks associated with borrowing money to consumers and mitigating possible losses due to the insolvency of a given Borrower. Financial institutions use credit scoring to determine what person is eligible to receive a given loan, what the interest rate of the commitment should be and what amount of credit can be granted to that person.
The credit rating is based on the analysis of:
- the district in which the borrower resides,
- the number of people dependent on the borrower,
- the period of residence at the current address,
- employment period in the current position,
- employment with the previous employer,
- employment period in the same enterprise,
- held payment cards,
- bank accounts held,
- current savings programs,
- owning a car,
- having a telephone,
- having life insurance,
- banking references,
- housing status,
- age and marital status,
- education (especially if the person performs a privileged profession – a doctor, lawyer, IT specialist, notary public, dentist – that is, recognized in the credit assessment as guaranteeing re-employment, even in the case of immediate loss – dismissal from the current job).
- amount of monthly income
According to the official definition in the US legal act The Equal Credit Opportunity Act (Section 202.2), implemented by Regulation B, credit scoring has the following features:
- is based on data collected thanks to empirical comparison of the population of reliable and unreliable borrowers who applied for a loan in a certain time span,
- it is developed to assess the credit risk of the applicant, taking into account the creditor’s interest,
- is adapted and approved using accepted statistical principles and methods,
- it is periodically improved through the use of appropriate statistical principles and methods, modified in order to maintain the ability to assess the future.