Credit Scoring – The Alternative Guide
A while ago I made some videos about different elements to a business borrowing money. One of the most common questions asked to me was about credit scoring. There still is a thinking that credit scoring is some form of witchcraft or computers taking over the world. It is a computer making a decision, but the factors it considers are definitely man made.
Let me try and explain what credit scoring does, after that you can watch the video and see the analogy, it does actually make sense!
How It Works
Credit scoring is about applying points to different elements within a lending application. As the lender’s experience changes then so will the weighting applied to each area, meaning that credit scoring is a moving beast, however the theory remains the same.
It is about looking at negative similarities. What this means is the lender is looking at other lending deals that have gone wrong then seeing what similarities there were from that application to your own. Let me give you an example;
- A lender sees that pubs have caused several bad debts over the last 12 months, therefore the next application from a pub will be far more difficult
It sort of makes sense, however what it doesn’t do is look at why your pub is different. Stressing the differences is over to you, so make sure you understand your industry sector, recognise the risks and underline the difference you have.
The video analogy may actually help explain things a little clearer, if it doesn’t then get in touch and we will talk you through it.
By Dave Farmer