There are many tools in which a lender uses for credit risk assessment. Credit Scoring is a very common way in which a lender pools together a great number of factors in order to carry out their lending decision. Credit scoring first came about in the 1980s due to a need to process credit applications quickly and accurately. Traditionally lending decisions were carried out by individuals rather than computers however due to high volumes of applications and the information contained within them, the system had to quickly change.

Typically a credit scoring model will contain two different elements - The scorecard element keeps tabs of the score based on the questions asked and the statistical analysis of certain responses to those questions.

The scorecard consists of a range of questions that have been found to be relevant to an individual's credit risk, and the scorecard total gives a statistical indication of the applicant's creditworthiness - Their attitude to debt repayment. The following are typical questions that are asked throughout this process:

• Are you a homeowner?
• Length of time is your current job?
• Number of County Court Judgements?
• Do you have a home telephone number?
• Do you have a work telephone number?

Much of the scoring within the model may be based on information that seems completely irrelevant to the average borrower - For example, an applicant with a mobile number but no home or work telephone may represent a greater risk to a lender as they may be perceived to be more troublesome to contact in the event of default.

It is important to remember that it is not a lender's job to avoid all potential high risk debts - If this were the case then only those with an impeccable score would be able to obtain credit. The nature of the business is to assess the degree of risk and then price their interest rates accordingly. Lenders who wish to lender to those borrowers with an imperfect credit history or a low credit score may reflect that higher risk by charging an increased rate of interest on the loan product.

Credit scoring models have both advantages and disadvantages. The advantages include:

• Removing the human element of the risk assessment process. Although many would prefer the more personal touch, a consistent system ensures that decisions are made without the individual being swayed by personal factors.
• Credit scoring is far more cost efficient due to its automated nature - Largely the reason that it was first introduced.
• Amendments and changes can be made across the board with immediate effect.
• Most models are constantly evolving and being improved upon.

The disadvantages of using a credit scoring model will include:

• On rejection of an application due to the credit score, many individuals can be left feeling very dissatisfied largely due to the absence of one single identifiable factor.
• There may be the perception that application refusal is due to computer error.
• Certain individuals are able to manipulate the system by anticipating the most appropriate answers that will help them achieve a higher score.