Evaluating a Borrower’s Creditworthiness
And what are application scorecards and bureau scores?
In credit risk management, lenders and financial institutions use different methods to evaluate a borrower's creditworthiness. Two commonly used methods are application scorecards and bureau scores. Both these scores assess the creditworthiness of a borrower, but they differ in terms of the data sources and the criteria used to evaluate the borrower's creditworthiness.
An application scorecard is a credit-scoring model that evaluates specific aspects of a borrower’s creditworthiness based on the information provided in their loan application. This can include their income, employment history, and credit history. The scorecard is created using historical data on borrowers with similar characteristics to the current applicant. That data is analysed to identify patterns of behaviour that indicate the likelihood of the borrower defaulting on their loan. The scorecard generates a credit score, which is used by lenders to determine whether to approve or reject a loan application.
A bureau score, on the other hand, is a credit score that is based on the credit history of a borrower, as reported by credit bureaus. Credit bureaus collect information on an individual's credit history, including their payment history, outstanding debts, and credit inquiries. This information is used to generate a credit score that reflects the borrower's creditworthiness. Bureau scores are often used as a benchmark to determine the interest rate and credit limit offered to borrowers.
One key difference between the two scores is the data sources used to generate them. The application scorecard uses data provided by the borrower in their loan application, while the bureau score is based on the borrower's credit history, as reported by credit bureaus. This means that the application scorecard is a better indicator of the borrower's current financial situation, while the bureau score is a better indicator of their historical credit behaviour.
Another difference is the criteria used to evaluate the borrower's creditworthiness. The application scorecard is designed to evaluate specific aspects of the borrower's creditworthiness, such as their income, employment history, and credit history, that are relevant to the loan being applied for. The bureau score evaluates the borrower's creditworthiness based on their overall credit history, which includes all their credit accounts, payment history, and outstanding debts.
While both scores are used to assess creditworthiness, the application scorecard is a better indicator of the borrower’s current financial situation, while the bureau score is a better indicator of their overall credit behaviour. Lenders will often use both scores in combination to make informed lending decisions.