Credit scoring models provide a number of advantages, including consistency: models are well designed using the experience of the institution, they serve to objectively administer the claims of existing clients and new applicants.
Credit management programs and scoring models tend to be simple and easy to interpret, with relatively easy installation. The methods used for constructing such models are common and well understood, as well as the evaluation of these approaches.
Better organization of credit information: the systematization and organization of information contributes to the improvement of the process of granting credit. Reduced subjective methodology: the use of quantitative methods with clear and well defined rules contributes to the reduction of subjectivity in the assessment of credit risk, and
Increased efficiency of the process: the use of credit scoring models in credit directs the efforts of analysts, reducing time spent on applications and bringing greater efficiency to this process.
Main disadvantages of credit scoring models include cost of development: developing a credit scoring system may incur costs, not only with the system itself, but also with the necessary support for its construction, such as trained professionals, equipment, gathering information needed to develop the model, among others.
Overconfidence models: some statistics may overestimate the effectiveness of the models, causing users, especially those less experienced to consider such models perfect and thus not criticize their results.
Lack of timely data: the model uses data that was not reported, there may be problems in its use in the institution, producing different results than expected. Besides, due to the lack of some information, it is also necessary to analyze the quality and reliability of information available, since they represent the main input of the credit scoring models, and
Misinterpretation of scores: the inappropriate use of the system due to lack of training and learning on how to use their information may cause serious problems to credit institutions.
It appears, therefore, that credit scoring models can bring significant benefits to the institution when properly developed and utilized. However, they also have limitations that need to be evaluated well before the development and implementation of such a model.
Credit analysis used to test the borrower’s creditworthiness. The most commonly used types of credit analysis by banks include quantitative analysis: specifies the amount and stability of income distribution. Qualitative analysis: based on the analysis carried out for the quality characteristics of the borrower. These features have a significant impact on the customer’s propensity to fulfill credit obligations.
Credit management programs and qualitative analysis therefore includes evaluation of the client’s personal characteristics (age, marital status, number of people who are dependent on the status of housing and property, education, work experience, employment status, occupation).
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