Credit Scoring Models; Credit Models; Credit Risk Models; Decision Support Software

A credit score is a number indicating the creditworthiness of a company or an individual. Credit scoring models have several advantages:  They are relatively inexpensive to purchase and operate;  they enable rapid credit decisions to be made; and they provide consistent recommendations based on objective information.

Many credit scoring models are based largely on information contained in a credit report.  For many years, creditors doing business with consumers have been using credit-scoring systems to determine if applicants are good risks.  Credit scoring models can be used to automate the credit review process.  Rather than simply surrendering control of and responsibility for credit decisions to credit scoring software, credit professionals often use credit scoring models to provide guidance about what terms and what credit limit is appropriate for a given credit applicant or active customers.

While initially a tool for consumer credit granting, credit scoring is now wid to helpcreditors evaluate business-to-business credit decisions. Information about an applicant company and its credit experiences, including its bill-paying history, late payments, the number of times the applicant has been placed for collection, et cetera is collected from credit reports and other sources of information. Using sophisticated software, credit-scoring software helps predict:

• Whether the debtor company is likely to pay its debts on time, and
• The likelihood that the debtor company will file bankruptcy or in some other way default entirely on payment.

The use of credit scoring is becoming more popular in commercial credit granting. One reason is that credit scoring contributes to consistency in credit decision-making, which in turn permits companies to make decisions more quickly and more accurately. Credit scoring models not only eliminate bias and inconsistent application of decision-making rules, these programs can also shorten the time that it takes to evaluate an applicant for open account terms. 

Credit scoring models reduce risk, reduce the cost of evaluating applicants, and shorten the time needed to make credit decisions - and there is one important additional advantage: Many credit scoring models can be used to evaluate new accounts as well as the risk associated with continuing to sell to active customers.  The best credit scoring software programs mimic human decision making. There are relatively unsophisticated programs available that are inexpensive and/or easy to use but the quality of the decisions they recommend suffers from the software’s lack of sophistication.

(See also "Altman Z Score")

© 2010 by Michael C. Dennis.  All Rights Reserved.  Mr. Dennis is an author and a business consultant.