What is Credit Scoring?

Credit scoring is a means of determining the creditworthiness of an individual. Generally considered to be an objective way of evaluating the ability of the individual to receive some type of credit, the process of credit scoring focuses on three core criteria, although other information may also be considered.

The first key factor in credit scoring has to do with the past credit history of the potential borrower. The prompt payment of at least the minimum amount due on credit cards, and a lack of late payments on loans are a strong indicator of the general attitude of the applicant when it comes to meeting obligations. Creditors will tend to rate borrowers who have honored obligations in a timely manner higher than those who seem to have trouble making payments on time.

Evaluating the current status of credit limits and outstanding balances is also crucial to credit scoring. Here the total amount of available credit already extended to the applicant is considered. This is compared to the percentage of available credit that is currently in use. The idea is to determine if extending credit above and beyond what is already extended is likely to place an undue amount of risk should the applicant choose to make use of all available credit.

Finally, the current income of the applicant is considered. In order to extend credit, a lender must be able to establish that there is a reasonable chance that the borrower will have a steady source of income that can be used to repay the debt. Even if the applicant has always paid his or her bills on time and currently carries little to no debt, an inability to present at least one verifiable source of income is likely to prevent the extension of credit.

For each positive factor identified, the process of credit scoring raises adds to the amount of the score. Negative factors, such as late payments of delinquencies on outstanding debt, decrease the score. Many lenders have a range of credit scoring they consider essential before they will extend credit to an applicant.

The process of credit scoring is commonly used as part of the qualifying process for any credit applications. For this reason, consumers should review the credit report on a regular basis to make sure that all information reflected in the report is current and accurate.