Unit 6: Application Assessment

Question 1

What is credit scoring?

Answer 1

It is a summary measure of risk, functioning as an automated technique to assist lenders in the analysis and assessment of loan applications.

It filters out loans that will be automatically declined, and estimates the risk profile of each case.

Question 2

When implemented efficiently, what are 3 things credit scoring enables loan applications to be?

Answer 2

1. Approved (subject to verification of info)
2. Declined
3. Flagged for an ‘override’ decision by a lender (within responsible lending guidelines)

Question 3

Is credit scoring particularly useful for managing small volumes of high credit facilities, or large volumes of small credit facilities?

Answer 3

Large volumes of small credit facilities.

Question 4

What are 4 benefits of credit scoring?

Answer 4

1. Improved response time (online applications).
2. Improved productivity.
3. Better customer service.
4. Greater competition between banks for loans.

Question 5

A credit scorecard is a simple form of credit scoring. What is a credit scorecard and how does it work?

Answer 5

It’s a set of rules that generate a numeric score for the various elements in a credit application.

Each score is added up to produce an overall score that represents the risk for the application and indicates whether the loan should be approved.

Question 6

What is the theory of credit scoring?

Answer 6

By looking at past performance we can predict the future repayment patterns of customers who share similar characteristics.

Question 7

What are 2 advantages of credit scoring?

Answer 7

1. Fast, automated decisions - efficient for large volumes of applications.
2. Reduces operating/admin cost and time (especially for applications that will be declined).

Question 8

What are 2 disadvantages of credit scoring?

Answer 8

1. Reliant on programming of historical information and probabilities (data may be too limited or wrong; program can be ineffective).
2. Dehumanising and not individualised.

Question 9

How can fraud detection be built into credit scoring?

Answer 9

Mainly through verification steps.

Question 10

Credit scoring has evolved into behavioural scoring. What is behavioural scoring, and what are 3 common factors considered?

Answer 10

Behavioural scoring is a method of determine the credit risk associated with an existing account. Considers:

1. Regularity of credit payments made.
2. Savings pattern of the customer.
3. Any unpaid items.

Question 11

What are 6 key components assessed in credit scoring?

Answer 11

1. Credit history - good and bad.
2. Credit defaults.
3. Overdue credit accounts.
4. Recent credit activity, especially last 12 months.
5. Employment stability (change in last 12 months?)
6. Residence stability.