Credit scores don't tell the whole story

CNY Business Journal (1996+), Apr 08, 2005 by Dickinson, Casey J

SYRACUSE - Getting a loan may be in the numbers for some borrowers. Those who look good on paper can receive a high "credit score" and be rewarded with the fast track to financing.

Major banks award points on a credit application for the applicant's positive credit history. If the applicant receives the requisite points, the loan can be rapidly approved, says Michael McMahon, senior vice president for commercial lending for KeyBank in Syracuse.

Prior to the use of credit scoring, loan officers performed much the same function by reviewing an applicant's credit report. The report, McMahon explains, told the applicant's story.

"We looked at when credit lines were opened, their purpose, and payment histories," he adds. "We didn't call it credit scoring, but it was a similar process."

Many banks have taken that review power out of the hands of loan officers and instituted numeric scoring systems that rank everything from time at job, length of residence, and home ownership in addition to payment history and solvency.

During the 1990s, many banks adopted credit-scoring systems based on the work of Philadelphia-based Robert Morris Associates, which is now called the Risk Management Association (RMA). The models of RMA, a 91-year-old association with 3,000 financial-institution members, assigned individuals a score based on a combination of weighted factors such as delinquency, bankruptcy, late payment, missed payment, and length of credit history.

Credit-reporting agencies, such as Experian, now list a credit score on their reports. Experian employs a scale ranging from 320 to 840 points, with a higher score indicating a stronger borrowing prospect with a lower risk. An Experian credit score may only change by about 30 points per quarter, so rebuilding poor credit could be a long process. Experian and other credit agencies use a credit-scoring model based on the one developed by Minneapolis-based Fair Isaac Corp. known as the "FICO."

KeyBank uses its own creditscoring system, says McMahon, so customers may see a different score on their own credit reports than the one the bank uses.

"Some banks may give different weight to different factors," McMahon explains, "One bank may assign different points for length at (current) residence than another bank does."

Though credit scoring may seem like an impersonal way to conduct business, it has resulted in faster approvals for those with the proper scores.

"With today's technology, consumer-credit approval can be done within the hour," says McMahon.

Rapid-approval, Small Business Administration-backed loans use scoring to put borrowers on the fast track.

Credit scores are only one step in the lending process, says McMahon. Lenders may not give as much weight to the score as to other factors in the application.

The score doesn't take the applicant's overall relationship with the bank into account," he explains, "If someone doesn't score well, we look [beyond] the score to see if there's something that can be done."

The New York Business Development Corp, (NYBDC), which makes Small Business Administration-backed business loans, doesn't use credit scoring to evaluate its applicants, says Robert W. Lazar, president and chief executive officer of NYBDC.

"We don't use credit scoring because that's not our business," says Lazar. "Our business is to find a way to get loans done."

So, credit scoring is only one tool, albeit a fast and efficient one, used by lenders in deciding whether or not to make a loan.

"The decisions we made without credit scoring are basically the same," says Key's McMahon. "It's just a simplified, faster process. for our loan clients."