What Does Judgmental Credit Analysis Mean?
Judgemental credit analysis allows lenders to decide whether to give or not give credit based on their opinions instead of a specific credit score model. Judgmental credit analysis looks at their application and uses experience with similar candidates to decide if a person is creditworthy. This method doesn’t use formulas or observational methods to decide who gets approval.
Taking Apart Credit Analysis Based On Judgment
A lot of small banks use judgmental credit analysis. Because they get so many applications, big banks usually have more automatic credit processes. On the other hand, smaller banks will use judgmental credit analysis because it doesn’t make financial sense to create a credit scoring system or hire a third party. It takes a different method than other credit checks but is still based on standard credit check criteria, like payment history, bank references, age, and other things. The credit provider uses this score to decide whether to give you credit.
Credit Scores in Different Ways
Most people are more familiar with the idea of a credit score and think of the FICO, or Fair Isaac Corporation, as the most popular credit score model. However, subjective credit analysis works well for smaller banks. Lenders and banks with more extensive portfolios use a credit score model to determine if a person is creditworthy using a statistical number. Then, lenders use credit scores to determine how likely a person is to pay back their bills. The credit score for each person is between 300 and 850. The higher the score, the more likely someone is to be honest with money. Even though there are other ways to score credit, the FICO score is by far the most popular.
A lender will decide to give you cash based on your credit number. An excellent example of a subprime customer is someone whose credit score is less than 640. To make up for the extra risk they are taking, lenders often charge higher interest rates on subprime mortgages than on regular mortgages. Also, if you have bad credit, they might demand a shorter payback term or a co-signer to help you pay. On the other hand, individuals with a credit score of 700 or higher usually have good credit and may be able to obtain a lower interest rate, which means they will pay less interest throughout the loan.
Each lender sets its credit score limits, but a credit bureau’s score is based on five main things: payment history, total amount due, length of credit history, types of credit, and new credit. People can get high marks if they have a history of paying their bills on time and keeping their debt low.
