The basic rule of a lender is to check if the borrower is reliable enough to lend to them. Banks and financial organisations have long employed credit scoring models. However, with the Covid19 pandemic, many growing challenges in the financial sector, such as lower return on equity, lower credit investments, and the need to attract new customers worldwide, require a more flexible lending approach from a financial institution. Credit scoring software enables banks and financial organisations to successfully develop their client base while minimising credit risk.
Before we get into the differences between standard and alternative scoring, let’s define credit scoring and why it’s important. Credit scoring is assessing a borrower’s creditworthiness for a loan offer. Upon scoring, the applicant will receive a three-digit number representing the score. If the score is high, financial institutions will lend to the borrower; if it is low, financing will most likely be denied. But, of course, any consumer who wants to see their credit score can do so, as banks and other financial institutions agree with their clients’ agreement. So, dedicated software development is ideal here.
Around the world, there are a variety of traditional credit rating models. Taking the most popular in the United States as an example. The two are FICO and VantageScore. Both have many similarities, but there are several aspects to consider when settling on a credit rating.
FICO is the most popular grading model in the United States, developed in 1989. Over 90% of the top lenders in the United States use it. FICO offers different types of scoring. For example, if a customer is looking for a car loan, they need to check the FICOTo apply for a credit card. Customers must first verify their FICO Bankcard Score. Payment history is the most important aspect considered by FICO when calculating a score. The FICO score range is as follows:
VantageScore would be a model that competes with FICO, which was founded in 2006. Like FICO, VantageScore offers users multiple suites, depending on the purpose of the loan. In addition to this, the different suites contain different elements for tracking credit behaviour. The VantageScore 4.0 model incorporates trend data into scoring decisions. VantageScore focuses primarily on the customer’s credit card balance and credit utilisation when determining a customer’s score. The score range is as follows: The credit scoring model is not limited to FICO and VantageScore. These are mostly based on the two most popular models, although they also include their scores.
Alternative scoring models are derived from traditional scoring and statistical methods and are effectively enhanced by digital innovation. This implies that credit bureaus are not required to seek score data reports from them. Instead, you can use the latest digital technology to capture and evaluate your customer’s digital footprint. Credit scoring software solutions are useful when traditional office data is not available, when there is little access to various data sources, or when borrowers fall into the bank-deficient consumer group. Whenever these scenarios arise, lenders find it difficult to accurately assess credit risk.
Credit scoring software interests today’s lenders increasingly. This allows lenders to expand their customer base by shifting the focus from trusted customers to potential customers with low scores in traditional rating systems. Businesses can now provide loans to persons that do not have a credit history or a bank account. Students, freelancers, low-income households, households without a bank account, etc., can repay the loan on time. In a survey of household use of banks and financial services, FDIC found that in 2019, 5.4% of US households, or 7.1 million people, were not using banks. US statistics look promising compared to the percentage of the world’s non-bank account population by country.
Another reason why more lenders are contemplating adopting alternative credit scoring is the looming Covid 19 epidemic in 2020. This epidemic resulted in a wave of layoffs and a considerable drop in family income. More and more lenders are looking to build credit scoring algorithms in order to overcome the financial problems caused by the epidemic. We recommend CRM Consulting for CRM related issues.