What is a Credit Score?
- Scoring is a method of assigning a numerical value (the “score”) to a client in order to predict how likely he or she is relative to others to experience some event or perform some action in the future. This is predicated on the notion that past behavior is indicative of future behavior for populations with similar characteristics.
- By analyzing a sample of historical client and business data, trends are deduced to better understand (potential) clients and predict future events such as credit repayment.
- This tool guide focuses on credit scores – a number that represents an assessment of the creditworthiness of a person, or the likelihood that the person will repay a loan. Financial institutions use scoring models to assess the credit risk of a borrower and aid in the credit evaluation processes.
- A score can be applied along the steps of the microfinance lending methodology, providing objective inputs to make the process more effective and enhance standards and controls. Credit scoring models are not intended to replace loan officers and other commercial staff, but rather to complement and facilitate their work by supporting assessment of willingness to pay.