Credit scoring – how it works

Scoring is a concept that everyone who applies for a bank loan should be familiar with. It depends on the result of the scoring that the bank will grant you a loan. Some criteria for this assessment may seem surprising.

Scoring – what is it?

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Scoring is a point method of assessing the customer’s creditworthiness, prepared on the basis of an analysis of specific features and criteria. What influences the setting of these criteria? Individual banks constantly analyze how their clients pay their liabilities and on this basis, they create the profile of an ideal borrower.

If the statistics of bank A show that the most reliable customers are people with a family, no more than 50 years old, working in the service industry and having higher education, then these features will be scored the highest in bank

A. Of course, in Bank B the situation may be completely different: they’re the most reliable customers can be lonely people with secondary education, working in the production industry. And just such potential borrowers Bank B will score the highest.

Here are some selected criteria that can be analyzed by banks:

  • profession
  • education
  • place of residence
  • period of residence at the current address
  • period of employment in the same company
  • earnings
  • owning a telephone
  • marital status
  • having life insurance
  • owning savings products
  • owning a car

Customer responses to questions regarding individual criteria are scored in a specific way, with each bank setting a different score. The bank also defines the so-called cut-off point, i.e. the number of points that a potential customer must reach to obtain a loan.

If a person receives a lower number of points, their application will be automatically rejected. What if the number of points you receive will only slightly exceed the cut-off point? In this case, the bank may grant you a loan but require additional security.

Credit scoring – what do you need banks for?

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Getting a loan from a bank can be more difficult than getting a loan from a loan company. Why? The bank must apply much stricter criteria. The money he borrows also comes from deposits, which in fact belong to his clients. That is why banks use tools such as scoring.

From the bank’s perspective, this method is quite easy to implement. Detailed information about the potential borrower is entered into the system, which analyzes the individual characteristics of the client, awards points and decides whether the person is reliable or not.

In this way, the decision to grant a bank loan is independent of the viewpoint of one or another bank employee and is objective. Which does not mean, however, that the system cannot be wrong? It is easy to imagine the situation that a person who receives a high score in the scoring process will not prove to be a reliable customer.

It can also be the opposite – a reliable customer will be rejected only because in terms of characteristics it resembles people who have shirked their debts.

Every bank has its own system

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The fact that every bank has its own system is also good news for the customer. It means that if your application is rejected in one bank, you can apply for a loan in another.

You always have another option – instead of going to the bank, you can contact a company that offers quick loans, which you can also pay back in convenient installments. Good Finance family offers such loans.

What types of credit cards exist

A credit card is a type of loan, and the money you spend is actually borrowed from the card provider, rather than debited from your personal account. Used wisely, a credit card is a safe and flexible way to pay and can be a good way to split the costs of major purchases in installments.

What is the credit card

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A credit card is a plastic card that gives you access to the credit you can spend to shop, reduce debt and earn rewards. A credit card can be issued by a bank or other type of lender, and you can apply to a branch or apply for an online credit card.

How does the credit card work?

Credit cards basically work as a loan, but instead of getting the money in your bank account, you get credit directly on the card. The lender will set a credit limit, and you will be able to spend as much as you need, before repaying part or all of the balance each month.

What types of credit cards are there?

You can get the following types of credit cards, depending on your needs:

Balance transfer cards: Balance transfer credit cards allow you to move existing debt to a new credit card, which often has lower interest rates. This means that you can pay your accumulated balance on other credit cards at a lower rate.

Rewards Cards: A credit card with rewards gives you access to benefits and incentives, such as points in physical or online stores, discounts on airfare or return shopping, every time you use the card. However, rewards credit cards can also have taxes, and if you miss too many repayments, you can lose access to these benefits.

International credit cards: owning an international credit card means that you will be able to use it abroad without being charged. These can be a useful way to manage your vacation expenses, as you won’t have to worry about running out of cash.

Money Transfer Cards: A money transfer credit card is similar to a balance transfer card, but instead of moving an existing balance to pay a lower rate, you move the money from the credit card into a Bank account. This type of card can be useful for paying off a loan or an overdraft.

Shopping Cards: Credit cards for purchases are designed to be used for shopping, and many offer low-interest rates or 0% when you use them for shopping. In essence, you can borrow money for free, if you opt for the most advantageous shopping card without interest. If you want to use the card for other purposes, then you must choose a cash withdrawal card or the most advantageous shopping card that allows you to withdraw money with a very low-interest rate.

How should you use your credit card?

How should you use your credit card?

There are some general rules that you must follow when using your credit card, as these can help you build a strong credit report. E.g:

1. Maintains low credit utilization ratio

The credit utilization ratio is the value of the credit you used in relation to what you have available. For example, if the credit limit is 1,000 euros and you used 500 euros, your credit utilization rate would be 50%. However, most lenders would prefer to keep the ratio below 30%, because using more limits may indicate that you have financial problems and therefore you are a higher risk customer.

2. Make repayments on time

While most credit cards charge a fee if you miss monthly repayments, you can lose benefits or incentives attached to your credit cards, such as reduced interest, zero interest or cashback periods. In addition, the lack of too many payments can damage your credit report – this means it will be harder to get accepted for loans and loans in the future.

3. Pay more than the minimum

When you make credit card payments every month, you can usually pay a set minimum amount to avoid late fees and not to lose incentives. This can be useful for the months when your budget is tight. However, just targeting a minimum for a period of time generally means that you will need more time to pay off your balance.
Also, you will end up paying much more in interest, being an expensive way to repay the loan.

4. Establish a direct flow

If you think you may forget to pay the balance each month, it may be useful to set up a direct debit to pay at least the minimum amount. This way you can rest assured knowing that you have paid the minimum amount, while nothing prevents you from paying even more when you can.

5. Do not withdraw cash or use your credit card abroad

If not specified in the credit agreement, you will be charged a fee if you wish to use the credit card to withdraw cash or to pay with it abroad. It is best to check in advance to make sure you know how to use the card.

6. Take advantage of rewards

Some credit cards come with rewards such as cash back on purchases or reduced airfare every time you spend, although creditors often charge a fee for these cards. If you think these rewards will be useful to you then it may be worth the cost. But if you most likely won’t take advantage of them, you should think twice before opting for a reward card.

How do you apply for a credit card?

When applying for a credit card, using an online credit calculator or checking application can be a good way to make sure you find a type of credit card for which you are eligible. When you have found the one you want, you can generally apply by phone, post or at the lender’s branch. However, in most cases, it will be easier to apply for an online credit card.

If your application is accepted, the lender will set a credit limit and offer you the best interest for your possibilities. The actual rate you will pay depends on factors such as credit history and personal financial circumstances. You will receive the new credit card either by post or you will pick it up from the branch, and once you have it, you just have to activate it and it is ready for use.

Should I apply for a credit card?

Should I apply for a credit card?

Before applying for a credit card, you must consider the following:

Your existing debt: If you have existing debt, you may want to pay as much of it as possible before applying for a credit card. This is because the existing debt can indicate to the creditors that you have financial problems, which could refuse your credit because you are a high-risk applicant.
Your Open Accounts: If you have unused open credit accounts, it may be a good idea to close them, because otherwise, creditors might think it will be a problem for you to cover all outstanding balances.
The request: Before submitting the application, you must make sure that all the details are filled in correctly, as even a small mistake can lead to the rejection of the request. If you are denied a loan, it is best to wait sometime before applying again. If you make too many requests in a short time, you can become a high-risk applicant.
Your credit history: Credit history is probably the most important factor that creditors take into account. It gives them an idea of ​​how serious you are, and if you will make the repayments on time and in full.

How much does it cost to use a credit card?

The cost of using a credit card will depend on the card you have, as well as how you use it. You can break down the potential costs into the following:

Interest – The interest of a credit card tells you how much it costs to borrow money from your lender – in essence, how much you will pay back over the actual amount you borrowed. Some credit cards offer zero interest on purchases, balance transfers, and money transfers. However, you can avoid paying interest on your credit card if you repay the entire balance every month.

Taxes – In addition to the interest rate, there may be taxes involved in your credit agreement. These may include late payment / missed payment fees, overdraft fees, withdrawal fees, and fees for using the card abroad. There may also be fees for the benefits or incentives you receive as part of the credit card contract.

How much can you spend on a credit card?

The amount you will be able to spend using your credit card will depend on the credit limit that the lender grants. Normally, creditors will decide the credit limit after a credit check is made, taking into account outstanding debts, possible missed payments and the amount of credit you currently have.

It is possible that you can increase your credit limit after a period of time if the lender sees that you pay your installments on time or if you quickly repay the full amount. Note that if you exceed the credit limit, it will normally come with a fee.