Credit Scoring
What is credit scoring?
Credit scoring is another tool lenders use to assess the
credit worthiness of a potential borrower. This tool is often
used, in addition to the analysis of the borrower's financial
statements, key financial ratios. RMA (Robert Morris Associates)
ratios are sometimes crucial in the lenders decision to make a
loan and/or in establishing the terms and conditions of that
loan.
Some key facts to keep in mind concerning Credit Scoring
include the following:
| 1 |
Many lenders use Credit Scores, or more specifically
credit bureau scores, to help determine whether a
business or individual is likely to repay a loan on time.
|
| 2 |
Credit Scores serve as a snap shot that records the
picture of your credit risk at a specific point in time. |
| 3 |
The Credit Score is just one method used by the
lenders to make a credit decision. |
| 4 |
The Credit Score is a summary of the borrower’s
credit report reduced to a numerical measurement that is
used to reflect the borrower’s ability to manage
credit. |
| 5 |
Credit Scores are based on the records compiled by
the credit bureau and summarizes the information reported
each month by the borrower’s creditors (i.e. the
amount of existing credit and payment history). |
Credit Scores are derived from five (5) major categories of
credit information. In the order of importance they include:
| 1 |
Late Payments, Delinquencies & Bankruptcies; |
| 2 |
Late Payments, Delinquencies & Bankruptcies; |
| 3 |
Outstanding Debt; |
| 4 |
Length of Credit History; |
| 5 |
New Applications For Credit; |
| 6 |
Types of Credit in Use. |
You can contact any of the major credit bureaus and to obtain
a copy of your credit report.
Tips:
What is the information on my credit report is incorrect?
If some of the information in your credit report is
incorrect, you can request that the credit bureau correct any
errors. The credit bureau must investigate and respond within 30
days. Loan Officers make loan decisions, not Credit Scores.
Credit Scores are tools for helping the loan officer make the
decision.
How do lenders obtain Credit Scores?
The lender will use its computer to calculate the scores
from its own internal credit scoring model or automatically
obtain a score from a credit bureau.
