Credit Scoring Software Development
The basic rule of a lender is to check if the borrower is reliable enough to lend to them. Banks and financial institutions have long used various credit scoring models. However, with the Covid19 pandemic, many growing challenges in the financial sector, such as lower return on equity, lower credit investments, and the need to attract new customers around the world, require a more flexible lending approach.
As a result, many of them are developing credit scoring software today. Credit scoring software allows banks and financial institutions to grow their customer base effectively while keeping credit risk low. As a result, more and more companies consider using AI-based credit scoring software as an alternative to traditional scoring models. In this article, you’ll learn what a credit scoring system is, the main benefits of this type of software, and how to implement it in your FinTech solution.
Traditional credit scoring and alternative scoring
Before we dive into the difference between traditional and alternative scoring, let’s find out what credit scoring is and why it matters. Credit scoring is a way to assess a borrower’s creditworthiness for a loan offer. Upon scoring, the applicant will receive a three-digit number representing the score. If the score is high, the financial institution will lend to the borrower, but if the score is low, the loan is more likely to be refused. Clients interested in the score can see the score, just like banks and various financial institutions, after getting the client’s permission. A Dedicated Development Team is a good idea to pursue for this.
Traditional credit scoring
There are many traditional credit scoring models around the world. As an example, let’s look at the most popular ones in the United States. They are FICO and VantageScore. Both have a lot in common but many factors to consider when deciding on a credit rating.
FICO is the most popular scoring model in the United States, developed in 1989. It is used by over 90% of the top lenders in the United States. FICO offers different types of scoring. For example, if a customer is looking for a car loan, they need to check the FICO AutoScore, but they need to check the FICO Bankcard Score to apply for a credit card. When determining the score, FICO mainly depends on the payment history. The range of points for FICO is as follows:
VantageScore is a competing version with FICO created in 2006. Like FICO, VantageScore additionally gives its customers numerous suites relying on the mortgage purpose. In addition, specific suites encompass different factors for monitoring credit score behaviour, e.gVantageScore 4.0 version consists of trended facts in its scoring decisions.
When determining a patron’s rating, VanateScore focuses on the clients` credit score card balances and credit score usage ratio. The rating tiers encompass:
The credit score scoring fashions aren’t restricted to the best FICO and VantageScore, which offer their rankings, even though they’re closely based on those famous maximum fashions.
Alternative Credit Scoring
An opportunity scoring version derives from traditional scoring strategies and statistical strategies, which are correctly superior via means of virtual innovations. It states that lending businesses don’t ought to request scoring facts reviews from credit score bureaus. Instead, they could use intelligent virtual technology to accumulate and examine clients’ virtual footprint.
The utilisation of credit score scores as a software program answers is powerful. But, at the same time, traditional bureau facts are unavailable, there’s little entry to various facts sources, or debtors fall into the organisation of underbanked consumers.
How FinTech Companies Utilise Alternative Credit Scoring
Lending businesses have become extra interested in credit scores as software programs today. It permits creditors to enlarge their patron bases by moving their attention from credit score-worth customers to capability clients who might benefit from low rankings in traditional scoring systems. This way, businesses can provide loans to the ones human beings who’ve no credit score histories or financial institution accounts, e.g., students, freelancers, families with low income, unbanked human beings, and others, while being confident that they’ll pay their loans again on time. So, hire full stack engineers depending on your company needs or learn a data engineer on ProjectPro Data Engineering Projects for Beginners.