Personal Finance

Judgmental Credit Analysis

What is Judgmental Credit Analysis?

Judgmental credit analysis is a method of approving or denying credit based on the judgment of the lender rather than a specific credit scoring model. Judgmental credit analysis entails evaluating a borrower’s application and using prior experience with similar applicants to determine credit approval. This process avoids the use of any algorithmic or empirical process to determine approval.

Break judgment credit analysis

Judgmental credit analysis is primarily used by small banks. Although larger banks typically have more automated credit processes, due to the high volume of applications they receive, smaller banks will use judgmental credit analysis because it is not economical for them to develop credit scoring systems or hire a third party to build credit scores. The approach to judgmental credit analysis is unique and is based on traditional credit analysis criteria such as payment history, bank certificates, age and other elements. These are scored and weighted to provide the overall credit score used by credit issuers.

Different Types of Credit Scores

While judgmental credit analysis is suitable for small banks, most people are more familiar with the concept of credit scoring and most often associate it with FICO or Fair Isaac Corporation, which created the most commonly used credit scoring models. Larger banks and lenders use credit scoring models that use statistics to assess the creditworthiness of consumers. The lender then uses the credit score to assess the individual’s likelihood of repaying the debt. A person’s credit score ranges from 300 to 850. The higher the score, the more financially trustworthy a person is. While there are other credit scoring systems, the FICO score is by far the most commonly used.

Credit scores play a key role in a lender’s decision to provide credit. For example, someone with a credit score below 640 is generally considered a subprime borrower. Lenders typically charge interest on subprime mortgages at higher rates than traditional mortgages to compensate themselves for taking on more risk. For borrowers with low credit scores, they may also need shorter repayment terms or co-signers. Conversely, a credit score of 700 or above is generally considered good and may result in a lower interest rate for borrowers, resulting in them paying less interest over the life of the loan.

Each creditor defines its own credit score range, but credit bureaus use five main factors when calculating a credit score: payment history, total amount owed, length of credit history, type of credit, and new credit. Consumers can score high by keeping their bills paid on time and a long history of keeping debt low.

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