In the financial market, lenders such as banks and credit card companies use credit scores to assess the potential risk of issuing a loan to an individual, in an attempt to mitigate losses. In essence, a credit score determines the credit worthiness of an individual. As a result, an individual’s credit score can significantly impact his/her ability to obtain a loan.
To derive credit scores, credit scoring systems like FICO use complex and advanced algorithms that are evaluated and developed regularly. In fact, over 90% of all consumer lending decisions use the FICO score. Tweaking and double-checking the algorithms are essential as economic conditions change a consumer’s ability to repay loans and laws change the way in which consumer’s repay loans. These FICO scores range from 300-850; borrowers with lower FICO scores have to finance loans at higher interest rates. To control the risk that borrowers might not repay their loans, lenders divide borrowers into tiers based on this score. So, it is imperative to calculate credit scores accurately for both the lender and borrower in a financial transaction.