FICO Scores in Awarding Loans to Customers - Assignment Example

?FICO Scores in Awarding Loans to s Internal Memo The New Banking Interns, Fidelity Trust Bank Loan Officer, Fidelity Trust Bank RE: Updates on using FICO scores to determine the customers to e granted loans Date: Oct 21, 2013. I am writing to give you updates on the role of FICO scores in determining whether the customers you serve at the bank can be granted loans. Like you have learnt through our previous training sessions and banking orientation courses, the standards and the principles used in banking services management are very important to the banker. Under the same outlook, FICO scores are very important to the banker, because they can determine the success or the failure of the bank in the short and in the long term. FICO scores are reviewed by almost all lender agencies in America, before they arrive at credit decisions to offer their customers credit. For that reason, through the proper usage and incorporation of the scores, as a banker, you will be able to avoid customers with poor credit history, which will improve the financial performance of Fidelity bank. Overview of the main Fico Scores The FICO scores of customers will take into account, five main information categories that relate to the customer’s credit profile. When using FICO scores to determine the customers that can be offered loans, the chart given below displays the comparative weight offered to the different score areas. The 5 main areas featured in FICO scoring and their relative weight The review of the different ingredients of the FICO scores 1. Payment history The payment history of the customer contributes about 35 percent of their FICO score. The information reflects their information on different financial accounts and areas. The different accounts reflected through the information include Credit card worth and standing, for cards like MasterCard, Visa, Discover and American Express. The second accounts featured are retail accounts, where the customer’s financial operations reflect the credit collected from outlets where they do business – showing the credit cards used at departmental stores, and the credit history maintained. The third account reflected is installment loans, where regular reimbursements for loans like mortgages or car loans are reflected. The fourth account reflected through the payment history is finance company records. Additionally, collection items and public records are reflected, giving information on events like foreclosures, bankruptcies, wage attachments, lawsuits, judgment and liens. Lastly, this score area gives information on the accounts that don’t show late payments, and whose financial obligations are met as agreed upon. From the information captured about the different accounts and fields named before, you will use your judgment to verify whether the given customer has shown a history of repaying loans and whether their financial standing warrants the loan they are asking for. Therefore; based on the information captured, you will only offer credit to a customer with a favorable credit history and avoid those with poor payment history, because a poor history shows that they are more likely to give problems when repaying the credit. 2. The second area where you need to pay much attention is the field of the amounts owed. This information reflects about 30 percent of a customer’s FICO scores, which indicates their level of indebtedness. The areas reflected by this variable include the amounts owed for the different accounts held by the customer, the amounts apportioned to different account types, the balances from different account types, the proportion of the credit consumed through credit cards among other credit accounts and how much the customer is yet to pay, on different loan amounts. Through the review of this score area, as bankers you will determine the level of debt that the customer has collected, which can influence their ability and their pattern of loan repayment. For example, from the case of a customer who has used larger proportions of their credit limits, it is more probable that they will have problems with repaying the loans, in the case that they are allowed to get one. Further, in the case that the customer has a long history of consistent credit accounts payment – the information can depict that they are more likely to manage the new loan in a better manner. 3. Length of credit history This area accounts for about 15 percent of a customer’s FICO score, where a longer history reflects an improved FICO score. Through the review of the information on the length of the customer’s credit history, inferences can be drawn on their befitting loan repayment timetable and their tendency to use credit financing. In determining whether to offer a given customer credit, the information on the duration taken to repay their credit reflects the tendency of a customer to establish credit accounts and whether the accounts have been used and run accordingly, this demonstrates that the customer can deliver upon the contractual loan agreement. 4. New Credit This area reflects about 10 percent of the customer’s FICO Score, where a customer that has opened numerous credit accounts in a short period of time is more likely, not to meet the financial demands of all accounts. Especially, in the case of a customer without a long and proven credit history, this can reflect that the customer is overburdened with credit, therefore, giving them a loan can be a bad move. The credit history will reflect other facts, including payment problems experienced in the past, which reflects that it is highly probable for the customer to have problems with the repayment of the loan that they are asking for. However, when using FICO scores, it is necessary to consider that during the scoring of a customer, the credit requests made to different lenders for the same loan are regrouped, as long they fall within a shopping duration. For that reason, as a baker, it is necessary to note that different credit requests can reflect credit shopping for the same loan, which should not deter giving the given customer the loan they are asking for. 4. Type of Credit used This information area contributes about 10 percent of the score of the customer. The information is compiled following a consideration of the customer’s mix of retail accounts, credit cards, finance company accounts, installment loans, and mortgage loans. In determining whether to offer a customer a loan – it is important to note whether they have had experience in dealing with fixed loan plans and revolving accounts like credit cards. Proving their knowledge in the financing of fixed loans shows that they are more likely to meet the obligations of the loan better than a customer without the experience. Further, through a review of the overall credit picture of the given customer, it is possible to determine whether the different plans and accounts held have been served and financed effectively. In the case that they have been financed effectively, there is a higher probability that the customer can finance the loan they are requesting from the bank. The insights offered will improve your understanding of customer credit management, and for further directions, you can report to my office. Thanks for your audience. Reference Fair Isaac Corporation. (2013). Credit Basics: Demystifying credit scoring and credit reports. My FICO. Retrieved from http://www.myfico.com/CreditEducation/articles/ Read More