The increased use of credit scoring has helped many entrepreneurs obtain financing. It has become so prevalent that one credit scoring company estimates that 85 percent of all lenders use credit scoring in their origination process.
How lenders base their credit decisions will help you when it comes time for you to look into financing. Many banks and loan institutions are beginning to rely more on credit scores instead of reports because the process can be less time consuming and more objective.
A credit score is simply a number that determines an applicant’s likelihood of repaying a loan. The number is largely based on recent payment history, amount of current credit and its history length. Things such as age, race, gender, religion, national origin, marital status, and whether or not they receive public assistance, are not considered in a credit score that runs on a scale from 400 to 900.
Applicants receiving a high score are perceived to be less likely to default on a loan, while those with lower credit scores are more at risk of default.
Having a lower credit score doesn’t necessarily mean a loan will be denied; in fact, many are approved. Loans are often reviewed by more experienced personnel to determine the cause for the lower score. Most lenders will not turn down a borrower’s application based solely on credit-scoring models.
If an applicant has a low credit score, it doesn’t mean that they can’t receive financing. Regardless of credit rating, consumers have several options to obtain a loan, including working through free counseling programs. These services help consumers remove obstacles to financing such as credit problems or lack of down payment funds, and places them back in the market as pre-approved buyers.
There are positives and negatives associated with the credit scoring process. The good news is that credit scoring is a non-bias process, meaning it doesn’t matter how you look, what type of job you hold or what part of town you live. On the flip side, if consumers have had previous credit problems, missed a few credit card payments or declared bankruptcy, the information will, in effect, reduce your score – regardless of the reason for the fault.