Why is credit scoring important?
Credit scoring is a procedure where an institution or an individual is evaluated based on its past payment patterns. In today’s highly globalized environment credit scoring is getting important day by day. It is important firstly, because it reduces the time and energy spent when evaluating a customer to give credit or enter into a transaction. The counterparty which is mostly the creditor or banks, checks the credit worthiness of its applicant just by entering simple identity numbers such as a social security number (SSN). This might well be the Tax ID or Citizenship ID depending on the country the method is employed.
One other reason why such procedures are important is that it increases the efficiency of the system in the sense that the creditor is ensured and on the safe side. This also reduced the bad loan ratio of the creditor company and builds trust among the other institutions of the country thereby helps reduce the interest rates as a whole.
One other advantage is to the end user. Nowadays in many countries, consumers or people seeking loans can easily get their answer simply by sending their SSN (Social Security Numbers) or Citizenship IDs as a Text Message to the numbers designated by banks or credit institutions. Getting their answers as positive or negative, consumers then decide on other options. Credit scoring procedures has advantages, since this method provides consumers the means to compare different quotes given by different institutions.
Posted by Credit Professor
on Nov 4 2009. Filed under Credit Score.
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