Use
Credit Scores Along with the Entire Report
Credit scoring has become the primary means of assessing a consumer’s
creditworthiness in most consumer finance industries. Credit scores
are calculated based on mathematical equations developed by Fair
Isaac Corporation. These score models are commonly known as FICO®
scores. FICO is the most popular scoring model used among lenders
and creditors to calculate a consumer’s credit risk. By comparing
this information to the patterns found in thousands of past credit
reports, scoring estimates the level of risk a lender or creditor
is assuming.
Credit scores
are most useful when used in combination with the total credit history.
While a credit score allows for a quick evaluation of a customer’s
creditworthiness, the information in the credit report itself may
provide valuable insight that can help you close the deal.
Review
the Credit Report Summary
Some credit reports provide a summary section for at-a-glance assessment.
The summary will give you quick information about the customer’s
payment history, available credit, and public record information,
such as bankruptcies. The summary is a great way to get a quick
snapshot of a customer’s credit history and can save you from having
to weed through the details of every tradeline in their credit file.
Look
for Major Derogatory Information First
Pay extra attention to bankruptcies. Many lenders will not even
consider financing a customer with a bankruptcy that’s less than
two years old. A particular lender may be more inclined to approve
a loan with this type of customer than others.
Consider
the Length of the Credit History
A customer that has extensive credit history is considered less
risky due to the amount of data available on their credit record.
The evaluation of over 30-years of payment habits and debt repayment
practices is more dependable than only 3-years of credit history.
Bottomline - the less credit history a customer has, the higher
the financial risk – and the higher the interest rates on their
loan.
Assess
Credit Card Usage
A customer that has balances of more than 50% of the credit line
is a red flag to lenders. It is often an indication that the customer
may be living beyond their means.
Determine
Any Mitigating Circumstances
If a customer has late payments or collections on their credit report,
there could be reasons behind the delinquencies that will impact
your lenders’ financing decisions. Interview your customer to gather
details that might play in the customer’s favor. Was this person
laid off from work or on disability during this period?
Pay
Attention to Recent History
The most important period to look for in terms of a customer’s credit
history is the last six months to two years. Lenders look very hard
at the recent past, and if there are delinquencies within this period,
it will have more of an impact than five-year-old delinquencies.
Making
a Match
In the end, the ability to efficiently assess a customer’s creditworthiness
in terms of the lender's criteria can help you to effectively match
the two together. Once you’ve made the perfect match, you have a
satisfied lender, an improved closing ratio, and a happy customer. |
