Credit scores are a three digit number. What does the number mean? How do I successfully interpret and use it? That’s the issue where most lenders can begin to fail or take the wrong path Credit scores do not predict whether a borrower will repay or default on a loan.

Policies and guidelines focused primarily on the avoidance of risk is one cause contributing to the inefficient application of credit scores. My experience confirms lenders lose far more loan income by the misapplication of credit scores than by bankruptcies or defaults of loan payments. 

The value of a hybrid score that combines application data from your own paying and nonpaying loans and the ability to compare and compete with generic pricing strategies provides an advantage for lending.

Most lending organizations have in place guidelines or policies that attempt to limit risk and exposure to adverse selection of applicants. In the case of generic credit scores the guidelines usually include risk ranges, loan term and interest rate.

It no longer surprises me that most lending managers and staff  know so little about the scores they are using or how to measure, change or statistically analyze their performance. When consulting with lending managers having issues with credit scores many times I would begin a meeting by asking them a simple question.

Without the proper tools to do “what-ifs” and test the most efficient method of implementing the decision templates, lenders often rely on a best guess, or choose conservative strategies that artificially limit the number of applicants able to be approved or without other options simply adopt a template from a 3rd party and hope for the best

One of the most egregious errors made by lenders is the neglect of applications that are declined. Declined apps represent potential customers at your business asking to be granted credit. After being declined the applicants go somewhere else and most likely obtain the loan you refused to make.

Lending activities are subject to various regulations and laws designed to protect the consumer. The major ones, Regulation Z (Truth in Lending Act, Regulation B (Equal Credit Opportunity Act), The Fair Housing Act (FHA) and Consumer Credit Protection Act are specifically designed to regulate the lending industry to make credit equally available to all creditworthy borrowers.