Credit Scoring

A statistical analysis performed by lenders and financial institutions to access a person's credit worthiness. Lenders use credit scoring, among other things, to arrive at a decision on whether to extend credit. A person's credit score is a number between 300 and 850, 850 being the highest credit rating possible.

Investopedia Says:
Fair Isaac Corporation's credit scoring system, known as a FICO score, is the most widely used credit scoring system in the financial industry. Lenders use credit scoring in risk-based pricing in which the terms of a loan, including the interest rate, offered to borrowers are based on the probability of repayment. In general, the better a person's credit score, the better the rate offered to the individual by the financial institution.

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Objective methodology used by credit grantors to determine how much, if any, credit to grant to an applicant. Credit scoring is devised by three different methods: by a third-party firm, by the credit grantor, or by the credit bureau in cooperation with the credit grantor. Some of the most common factors in scoring are income, assets, length of employment, length of living in one place, and past record of using credit. Any negative events in the past, such as bankruptcies or tax delinquencies, will sharply reduce an applicant's credit score. Credit Bureau scores are commonly called "FICO scores" because the three main credit reporting agencies (Equifax, Experian, and TransUnion) use scores produced from software developed by Fair Isaac and Company.

The process of evaluating and rating a loan applicant according to the quality of his or her creditworthiness. Factors considered include past use of credit, current indebtedness, and frequency of application for credit. For mortgage loans, a person's score may determine whether he or she is eligible for standard loan terms or must resort to a Sub-Prime Loan with less favorable terms. See Fico Score.
Example: When the Browns applied for a mortgage, the lender applied credit scoring techniques as part of the Underwriting process. After considering a number of factors designed to predict the applicant's probability of defaulting on the loan, the lender classified the Browns as "A" class credit risks. That means they are eligible for the most favorable terms in the market.