As much as we dislike the way banks assess loan applications using a computer, there are several good reasons why they use credit scoring.
They certainly don’t seem to be concerned with how angry their customers get when the “computer says no”.
So why do the banks credit score? Read on to find out.
Without a doubt, credit scoring is incredibly good at making the right decision.
Banks track the performance of the loans that they have approved, and they consistently see that loans that were approved by their credit score tend to have a very low level of arrears.
They also track the home loans that were declined by the credit score, that were then overridden and approved by a credit manager.
The results are staggering. Even when there is a good reason to override the credit score there is still a high level of delinquency in these loans.
It is for this reason that banks rarely override a decision made by their scoring system.
Has your bank declined your loan? Call us on 1300 889 743 or enquire online and one of our mortgage brokers will help to find a solution.
Experienced credit officers, credit managers and analysts don’t come cheap!
Banks need to pay well to attract the credit staff with the attention to detail, intelligence and work ethic required to make decisions on mortgage applications. Not to mention the cost of training and auditing.
As you can imagine, if a bank can reduce the number of credit staff they need by having a computer make all of the decisions instantly, then this will have a significant effect on their bottom line.
The applications will also be processed faster which can result in a better experience for the customer, unless their loan is declined of course!
As human beings we are all subject to our own opinions, moods, prejudices and goals. Credit officers are no different!
Two credit officers can come to different decisions for the same application, particularly when there are a few grey areas where their discretion is required.
Credit scoring levels the playing field. Each application is assessed in the same way using the same methodology, which gives a consistent decision every time.
Funding and risk management
To the general public, banks appear to be very stable with plenty of money to lend out at all times.
However the reality is that banks have a “warehouse facility,” which is like a giant overdraft of several hundred million dollars.
The banks lend out the money in their warehouse facility and then they sell off the loans to offshore investors in a process known as securitisation.
What does this have to do with credit score? When the bank’s warehouse facility is close to full they risk running out of money to lend!
As they get closer to running out of funds they can slow down new lending by tweaking their credit score and declining more mortgage applications!
As mortgage brokers, we often avoid particular lenders when we know they are experiencing funding pressures as they may be looking for any excuse to decline the loans submitted to them.
The senior management of banks can tweak the credit score on a daily basis to manage the number of applications being processed.
Banks try to avoid having too many or too few applications being processed at the one time so that they can maximise their profitability. The credit score is one of the tools they use to manage the volume of new lending.
Does credit score always get it right?
Where credit scoring comes unstuck on a regular basis is when the data in the bank’s system is incorrect.
When you are applying for a loan it is easy to tick the wrong box, forget some of your assets or put the wrong figure in a particular spot.
These small mistakes can result in you failing the lender’s credit score. When we submit loan applications we use software that automatically validates the data to remove these errors and prevents a large number of credit score declines.
More often than not, the banks’ systems are riddled with errors ranging from data entry mistakes, bank staff not using the system correctly or database “upgrades” removing critical information.
For this reason, banks often end up throwing the baby out with the bathwater, and declining good home loans for good people due to system errors.
What if my application is complex?
Complex applications with multiple applicants, companies, trusts or guarantees cannot be reliably assessed by a credit scoring system. Despite knowing this, many banks still credit score these types of applications!
If your application is complex then we recommend that you use a lender that does not credit score. Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will assist you.
Their credit scoring can also incorrectly profile customers. A good example is that sophisticated investors typically have a high number of enquiries on their credit file because they apply for lots of investment loans.
This can make them look like a “credit junkie” who applies for loans to fund their lifestyle. To the bank’s credit scorecard they look very similar!
Do you need help with a home loan?
Our mortgage brokers are experts in credit scoring and know how to get your loan approved. Please call us on 1300 889 743 or enquire online and one of our brokers will give you a call to discuss your options.