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Scoring Models – How Banks Approve or Decline Your Loan

Though a scoring model isn’t made of oil or water colors, it does paint a pretty clear picture of your financial state of affairs. Once your information has been entered into the application and sent to the centralized loan approval centers it will pass through a risk filter. This filter measures the likelihood the lender will be repaid over the term of your loan, and if the risk is acceptable.

How is this measured you may ask? Well, this is where we concentrate on the scoring model.

A scoring model is like a comparison, where the information gathered in your application is measured against a database of collected information and repayment risk scenarios, predetermining the likelihood you will repay your loan based on the experience the bank has had in the past with applications similar to yours. Consider over the years all the applications a bank has reviewed, all the information available to them to determine the profile of a potential delinquent loan, and how to identify its many factors before lending. Often, a bank will purchase the scoring model that has been developed from historical information. The scoring model does not in itself compare your application one any time with millions that came before yours, it merely measures yours against a series of ranges that are unique to applications that have proven to be desirable for repayment.

Most scoring models have a credit Bureau component built into them, automatically pulling in a recent report to the scoring model scenario to measure your financial fingerprint, that all-important repayment history. You may have a strong cash flow to service the new loan, but your credit report says you are a slow payer, or loans have been written off in the past because you refuse to pay. To make a proper risk assessment when lending, the model considers your historical repayment habits from your credit report, similar applications like yours from the past, to determine the likelihood of being repaid. Your current employment details, salary, additional income and its strength, cosigners/borrower’s, asset values and much, much, more are all weighed against scoring models identified as being of acceptable risk. There could be over 100 key points that are measured through a scoring model to determine the degree of risk with lending to a particular applicant. There could also be as few as four points measured depending on the amount of credit you are applying for at the time, and through what financial institution.

Scoring models don’t just measure the type of information presented, they also measure how you’ve entered it. For example, let’s say that Mr. Roberts was completing an application at his department store for a credit card. He decides that he doesn’t want to enter how much salary he earns a year and leaves it blank. The scoring model may view the type of person that leaves a blank for that question usually pays their bills on time, and simply takes exception to sharing how much income they earn. They could also view the blank negatively. These assumptions, being true or false, contribute to the overall application score.

All scoring models are different in some way, and they change often. Be careful, stay alert, and stay on track.

The financial institutions scoring model is likely to give a bonus point or two if you’re already a customer of the financial institution you are applying to. If you do all your banking with them they can easily determine how strong a customer you have been. Have you repaid your loans in the past to them? Are all your credit cards with them up-to-date? Do you have a checking or savings account set up for your day-to-day banking needs? If you answer “Yes” to these questions, the financial institution will prefer to lend to you as an existing client then to a new client where they have no first-hand experience. Having said this, your application still passes through the scoring model filter, but with the strength of an existing customer.

Sometimes it is advantageous to have an account with two major banks, to provide the opportunity to apply as an existing customer with both banks is one of them declines you. Swing your loyalty as your needs and their products change.

Department store credit cards likely never make it past the scoring model stage. Your application is either accepted or declined and there is no way to go back to try to get your application re-scored. In fact, you probably won’t be able to speak with someone regarding your application. Think twice before applying for this type of credit card. At least through a bank your able to appeal the decision at least once by speaking with a person who can help reposition your application depending on what needs to be improved. Besides, these department store credit cards charge a very high APR, and can damage your credit rating.

When applying through a bank, the experience of the person completing your application may also impact the credit decision. Positioning and wording is everything. An experienced lender has foresight in knowing how to word your information in a way that may appear more reasonable than a newer lender who has less experience assessing risk. This is a small influence in the over all scoring model process, but still is and influence to be sure. Find out the number of years of experience lender has before you firm up your appointment.

Try to speak with a lender who has been working with credit applications for at least a few years, someone also experienced in mortgages. This individual will likely have a refined foresight to further assist with positioning your application for success. After all, just presenting the facts isn’t everything; it’s how you present them that counts when the wire is tight. Selecting an experienced interviewer for the client interview is also important. Though you may feel that you have no choice of two interviews you to review your application, sometimes are able to request a particular person to conduct the interview. Do a little homework at your branch to understand who’s the most experienced lender, and try to request that they meet with you.