What Is Judgmental Credit Analysis?
Let me explain judgmental credit analysis directly to you: it's a straightforward method where lenders approve or deny credit based on their own judgment, not some fancy credit scoring model. When I say judgmental, I mean the lender looks at your application and draws from their past experiences with similar borrowers to make the call. This skips any algorithms or data-driven processes for deciding approvals.
Breaking Down Judgmental Credit Analysis
You see, smaller banks mostly use judgmental credit analysis. Larger banks handle huge volumes of applications, so they automate everything with credit processes. But for smaller ones, it's not worth the money to build a credit scoring system or outsource it. Instead, they stick to this judgmental approach, relying on classic credit analysis standards like your payment history, bank references, age, and other details. These get scored and weighted to create an overall credit score that the lender uses to decide.
Different Types of Credit Scores
While judgmental analysis suits smaller banks, you're probably more familiar with standard credit scores, especially the FICO score from the Fair Isaac Corporation—it's the most common model out there. Big banks and lenders use these statistical scores to gauge how creditworthy you are. They look at the score to predict if you'll repay your debts. Scores range from 300 to 850, and higher means you're seen as more financially reliable. Sure, other scoring systems exist, but FICO dominates.
Your credit score is crucial in whether a lender gives you credit. For instance, if your score is below 640, you're often labeled a subprime borrower. Lenders then charge higher interest on those mortgages to cover their risk, or they might demand shorter terms or a co-signer. On the flip side, a score of 700 or more is solid, leading to lower interest rates and less money paid in interest over the loan's life.
How Credit Scores Are Calculated
Each creditor sets their own score ranges, but credit bureaus calculate scores using five main factors: your payment history, the total amount you owe, how long your credit history is, the types of credit you have, and any new credit. To keep a high score, maintain a track record of on-time payments and low debt levels—it's that simple.
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