At some point in their lives, just about everyone applies for a credit card or loan yet most people don't know the process that is used to approve or decline a loan. The process of risk assessment and evaluation is called credit scoring. Here's how statistical experience and analysis is used to evaluate credit requests at Royal Bank Financial Group. When you apply for credit, be it a loan or a credit card, the financial institution reviews all of the factors that indicate whether or not you would be a good candidate for credit. Credit scoring analyzes an applicant's characteristics to predict future credit behaviour.
Most financial institutions have statistical information to build mathematical models.
When you fill in the credit application form, the questions about your bank relationship and job and residential stability are compared to database samples of others with similar characteristics. If this isn't your first credit application, the financial institution looks at your credit bureau report and at how you manage your other credit cards and loans. Then, based on a credit scoring formula, you and your repayment risk are evaluated and ranked. This is your Credit Score. These mathematical equations predict who is statistically likely to repay their loan or credit card.