Judgmental Credit Analysis

Judgmental credit analysis is a method of approving or denying credit based on the lender's judgment rather than on a particular credit scoring model. Judgmental credit analysis entails evaluating the borrower’s application and using prior experience dealing with similar applicants to determine credit approval. This process avoids using any algorithms or empirical processes to determine approvals.

Judgmental credit analysis is used mostly by smaller banks. Whereas large banks often have more automated credit processes, due to the volume of applications they receive, smaller banks will use judgmental credit analysis, as it is not economical for them to develop a credit scoring system or hire a third party to establish credit scores. The judgmental credit analysis is unique in its approach, and is based on traditional standards of credit analysis, such as payment history, bank references, age and other elements. These are scored and weighted to provide an overall credit score, which the credit issuer uses.

Though judgmental credit analysis works well for smaller banks, most people are more familiar with the concept of a credit score, and most commonly associate it with the FICO or the Fair Isaac Corporation, which created the most commonly used credit score model. Larger scale banks and lenders utilize a credit score model that uses a statistical number to evaluate a consumer's creditworthiness. Lenders then use credit scores to evaluate the probability that an individual will repay his or her debts. A person's credit score ranges from 300 to 850. The higher the score, the more financially trustworthy a person is considered to be. While there are other credit-scoring systems, the FICO score is by far the most commonly used.

A credit score plays a key role in a lender's decision to offer credit. For example, those with credit scores below 640 are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score. Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in them paying less money in interest over the life of the loan.

Every creditor defines its own ranges for credit scores, but when calculating a credit score, a credit bureau uses five main factors: payment history, total amount owed, length of credit history, types of credit and new credit. Consumers can possess high scores by maintaining a long history of paying their bills on time and keeping their debt low.