Credit Appraisal

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CREDIT APPRAISAL - The process by which a lender appraises the creditworthiness of the prospective borrower. This normally involves appraising the borrower s payment history and establishing the quality and sustainability of his income. The lender satisfies himself of the good intentions of the borrower, usually through an interview. Before extending any loan or credit to you, lenders check things like how much money you earn, how long you ve been using credit and whether you ve made payments on time. You ve to score big in credit report. Credit scoring is the statistical system used by lenders to determine your creditworthiness. Information about you and your credit experiences is collected from your loan application and your credit report. Using a statistical program, lenders compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points "a credit score" helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. The points are distributed in various aspects of your profile such as : - personal information : age, educational qualifications, number of dependents / children, spouse s income - employment information : organization, designation, length of service, etc. - income information : net income, installment of other loans, other liabilities. - net worth information : owning a house, vehicle, credit cards, telephone, etc. - previous relations with the lender : banking account, credit card, any other loan, etc from the same lender. Your level of education can give an indication to the lenders whether it is a good risk to extend credit to you. Higher the education better is the credit score. A person with professional qualifications is given more points than a simple graduate. Lenders prefer people who are stable. So, lenders assign more points to people who ve lived in a particular location or have worked for a single employer for many years. If you ve moved around a lot, you lose precious points. If you ve moved because of a better-paying job, you can recoup some of those points if your salary has increased, for example. Lenders rate your profession and your employers too. Most of the lenders have a list of approved companies. Credit points are allotted based on the type of company you work for or the type of profession you are in. The rating from most favored to least favored profession / organization may vary from lender to lender however an indicative list is presented here under: a) government / public sector undertakings / MNCs. b) teaching / educational institutions. c) scientists / engineers. d) banks / financial institutions.

e) chartered accountants / company secretaries. f) hotels / travel organisations. g) media / pr / advertising agencies. h) software companies. i) lawyers You get additional points based on whether you own a house, or have a ve hicle, or hold a valid credit card. Some lenders insist that all prospective customers must have a phone at residence. These factors play an important role in determining your credit eligibility. Why is credit scoring used? Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals. Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change. The trick here is you can t find out your score. Companies providing loans and credit do not disclose their credit appraisal criteria. Both the score and the statistics that go into it are top secret. The reason being that if people understood their appraisal criteria and scorings, they could cheat by altering their profile thereby artificially jacking-up their over all credit score. But, of course, we will try to improve our credit scores, won t we? What can i do to improve my score? There are certain things we do know. Fewer credit cards are better than several cards. Paying on time is a must. Some of the things that weigh heavily are stability both at home and on the job and a good payment history. The scoring system looks at how close you are to the limits on your cards, what you spend money on and how much you ask for in cash advances. Scoring models generally evaluate the following types of information in your credit report: - what is your outstanding debt? Many scoring models evaluate the total amount of debt that you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. - have you paid your dues on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid your dues late. - how long is your credit history? Generally, lenders prefer a seasoned credit history i.e. A credit track record of more than a year. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments, low balances and previous relationship with the lender.

- how many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many loans and credit card accounts may have a negative effe on ct your score. Scoring models may be based on more than just information in your application from and bank statements. For example, the lenders may call you for one-to-one discussion; investigate your credit reputation by contacting your employer, friends or neighbours. Lenders also look at your spending behaviour. The model considers all these information for evaluation. How reliable is the credit scoring system? Credit scoring systems enable lenders to evaluate a number of applicants consistently and impartially on many different characteristics. There are pros and cons to the credit scoring system. On the plus side, it eliminates discrimination because approval is based on raw numbers. Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately. On the other hand, the scores don t take into account consumers who have exceptional circumstances. If the score is too low, they re turned down. Still, you must understand how it works if you re going to get it to work for you. FROM SOME OTHER SOURCE

before extending any loan or credit to you, lenders check things like how much money you earn, how long you've been using credit and whether you've made payments on time you've to score big in credit report. "since personal loans are non-asset backed, the credit norms are definitely more stringent vis-a-vis other loan products'' says madhivanan of icici pfs. credit scoring is the statistical system used by lenders to determine your creditworthiness. information about you and your credit experiences is collected from your loan application and your credit report. using a statistical program, lenders compare this information to the credit performance of consumers with similar profiles. a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. a total number of points "a credit score" helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. the points are distributed in various aspects of your profile such as : a) personal information : age, educational qualifications, number of dependents / children, spouse's income b) employment information : organisation, designation, length of service, etc. c) income information : net income, installment of other loans, other liabilities. d) net worth information : owning a house, vehicle, credit cards, telephone, etc. e) previous relations with the lender : banking account, credit card, any other loan, etc from the same lender. your level of education can give an indication to the lenders whether it is a good risk to extend credit to you. higher the education better is the credit score. a person with professional qualifications is given more points than a simple graduate. lenders prefer people who are stable. so, lenders assign more points to people who've lived in a particular location or have worked for a single employer for many years. if you've moved around a lot, you lose precious points. if you've moved because of a better-paying job, you can recoup some of those points if your salary has increased, for example. lenders rate your profession and your employers too. most of the lenders have a list of approved companies. credit points are allotted based on the type of company you work for or the type of profession you are in. the rating from most favoured to least favoured profession / organization is

presented here under: a) government / public sector undertakings / mncs. b) teaching / educational institutions. c) scientists / engineers. d) banks / financial institutions. e) chartered accountants / company secretaries. f) hotels / travel organisations. g) media / pr / advertising agencies. h) software companies. i) lawyers j) dotcom companies you get additional points based on whether you own a house, or have a vehicle, or hold a valid credit card. some lenders insist that all prospective customers must have a phone at residence. these factors play an important role in determining your credit eligibility. why is credit scoring used? credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. it treats all applicants objectively. judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals. credit scoring models are complex and often vary among creditors and for different types of credit. if one factor changes, your score may change. the trick here is you can't find out your score. companies providing loans and credit do not disclose their credit appraisal criteria. but both the score and the statistics that go into it are top secret. the reason being that if people understood their appraisal criteria and scorings, they could cheat by altering their profile thereby artificially jacking-up their over all credit score. but, of course, we will try to improve our credit scores, won't we? what can i do to improve my score? there are certain things we do know. fewer credit cards are better than several cards. paying on time is a must. some of the things that weigh heavily are stability both at home and on the job and a good payment history. the scoring system looks at how close you are to the limits on your cards, what you spend money on and how much you ask for in cash advances. scoring models generally evaluate the following types of information in your credit report: a) what is your outstanding debt? many scoring models evaluate the total amount of debt that you have compared to your credit limits. if the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. b) have you paid your dues on time? payment history typically is a significant factor. it is likely that your score will be affected negatively if you have paid your dues late. c) how long is your credit history? generally, lenders prefer a seasoned credit history i.e. a credit track record of more than a year. an insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments, low balances and previous relationship with the lender. d) how many and what types of credit accounts do you have? although it is generally good to have established credit accounts, too many loans and credit card accounts may have a negative effect on your score. scoring models may be based on more than just information in your application from and bank statements. for example, the lenders may investigate your credit reputation by contacting your employer, friends or neighbours. lenders also look at your spending behaviour. the model considers all these information for evaluation. mr. sachin gupta of icici pfs says "it would not be wrong to say that every personal loan customer can be given a credit card but the reverse may not be true." how reliable is the credit scoring system? credit scoring systems enable lenders to evaluate a number of applicants consistently and impartially on many different characteristics. there are pros and cons to the credit scoring system. on the plus side, it eliminates discrimination because approval is based on raw numbers. although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately. on the other hand, the scores don't take into account consumers who have exceptional circumstances. if the score is too low, they're turned down. still, you must understand how it works if you're going to get it to work for you.

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