Credit scoring is a system most banks and lenders use to determine a customer’s eligibility for a loan, by using complex algorithms for identifiers usually associated with individuals who are most likely to default on a loan. In other words, they compare common characteristics for past customers who have defaulted on their loan with new applications they receive. This includes (but is not limited to);

Your Personal Situation – Employment, Genuine Savings, Location, Stability, Assets & Liabilities etc (Including many changes of address or employment)

Your credit file – Credit History, Credit Enquiries, Defaults

Your Application – Loan Amount, Serviceability, Loan Purpose.

Other “Unknown” characteristics (sometimes superannuation balance compared with age, or even not having a home phone number on the application)

Why do lenders use Credit Scores?

Accuracy

Without a doubt, credit scoring is incredibly good at making the right decision. Banks track the performance of the loans that they have approved, and they consistently see that loans that were approved by their credit score tend to have a very low level of arrears.

Cost

Banks need to pay well to attract the credit staff with the attention to detail, intelligence and work ethic required to make decisions on mortgage applications. Not to mention the cost of training and auditing. As you can imagine, if a bank can reduce the number of credit staff they need by having a computer make all of the decisions instantly, then this will have a significant effect on their bottom line.

Consistency

Two credit officers can come to different decisions for the same application, particularly when there are a few grey areas where their discretion is required, whereas a credit score will not discriminate.

Is it always right?

Where credit scoring comes unstuck on a regular basis is when the data in the bank’s system is incorrect.

When you are applying for a loan it is easy to tick the wrong box, forget some of your assets or put the wrong figure in a particular spot. These small mistakes can result in you failing the lender’s credit score. When we submit loan applications we use software that automatically validates the data to remove these errors and prevents a large number of credit score declines. We will also diligently ask as many questions as possible about your situation (sometimes these questions may seem unnecessary) to ensure your application is adequately prepared for a good outcome with your credit score.

What if my application is complex?

Complex applications with multiple applicants, companies, trusts or guarantees cannot be reliably assessed by a credit scoring system

If your application is complex then we recommend that you use a lender that does not credit score.

Not all lenders will use this system to assess their loans – if we see that your application may trigger an event with credit score, we will work with you to try and limit this by either asking more details questions about your situation, or even looking at a lender who won’t use a credit scoring system to assess your loan.

At Peasy, we also perform our own credit checks to try and minimise the chance that a loan might not proceed due to any issues with credit scoring. This allows us to increase the chance of submitting your loan with the right lender to suit your unique situation.

Of course, if you have any questions about credit scoring, please feel free to get in touch today.