Fico model builder4/6/2023 8īoth judgmental systems and credit-scoring systems assume that past experience can be used to predict future performance, but not with certainty: Even the best-rated loans might suffer default, and even the worst-rated loans might be repaid as agreed. Moreover, a factor considered in many judgmental systems is a statistically derived credit score. For example, both judgmental and credit-scoring systems ordinarily consider individuals' past experiences with credit as reflected in the credit records maintained by credit-reporting agencies. Although these systems differ in how the credit decision is made, they can rely on similar information in reaching the decision. As noted earlier, systems in which the credit decision is made manually by a loan officer or other person are referred to here as judgmental systems those in which the credit decision is made mechanically on the basis of a statistical model are commonly termed credit-scoring systems. The ability to quantify credit risk-the risk that a borrower will not pay back a loan as agreed-is central to the core aspects of lending: soliciting accounts, extending credit, pricing (that is, setting the interest rate or fees or other terms), and managing existing credit accounts. This section provides background information in areas that were central to the preparation of this report: (1) credit-risk evaluation systems, (2) the emergence of credit scoring, (3) the credit-reporting agencies, (4) the content of credit records, (5) the development and estimation of credit-scoring models, (6) generic credit history scores, and (7) the current uses of credit scores.īack to Contents Credit-Risk Evaluation Systems Submitted to the Congress pursuant to section 215 of the Fair and Accurate Credit Transactions Act of 2003Īugust 2007 Print (1.84 MB PDF) General Background Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit
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