Understanding Judgmental Credit Analysis
Judgmental credit analysis is a process where credit decisions are made based on the lender’s assessment rather than relying on a specific credit scoring model. This approach involves reviewing the borrower’s application and leveraging past experiences with similar applicants to determine credit approval. Unlike algorithmic methods, judgmental credit analysis is not based on automated processes or empirical data.
Breakdown of Judgmental Credit Analysis
Smaller banks often utilize judgmental credit analysis due to the impracticality of developing their credit scoring system or contracting third parties for credit scoring solutions. Unlike larger banks that rely on automated systems, smaller banks, through judgmental credit analysis, evaluate creditworthiness based on traditional factors like payment history, bank references, age, and other relevant criteria. Each element is assessed, scored, and weighted to generate an overall credit score used for decision-making.
Exploring Different Credit Score Models
While judgmental credit analysis is common for smaller banks, the general public is more familiar with credit scores, particularly the FICO score from the Fair Isaac Corporation, the prevailing credit score model. Major lenders utilize statistical credit score models to assess a borrower’s creditworthiness. Credit scores, ranging from 300 to 850, indicate an individual’s financial reliability, with higher scores signifying greater trustworthiness. Although other scoring systems exist, the FICO score remains the most widely used.
Credit scores significantly influence a lender’s credit decisions. Subprime borrowers, typically with scores below 640, are deemed higher risk, resulting in lenders imposing elevated interest rates or additional requirements like a co-signer. Conversely, individuals with scores of 700 or above are considered low risk and may qualify for lower interest rates, equating to reduced interest expenses over the loan term.
Credit bureaus evaluate credit scores based on five key factors: payment history, debt levels, credit history duration, credit mix, and recent credit applications. Maintaining timely bill payments and minimal debt can lead to higher credit scores, benefiting consumers in accessing favorable credit terms.