In the world of credit, it is better to have borrowed and paid back late on occasion than to have never borrowed at all. Knowing the score could be particularly useful for consumers as the economy slows and money becomes harder to borrow. Bankers continued to toughen their terms for loans to consumers and businesses over the past three months, according to a Federal Reserve survey issued Monday. Banks use credit scores differently, but they are becoming a mainstay in loan decision-making. Some banks, particularly large, national ones, use credit scores alone to make loan decisions.
Many smaller banks view the score as one factor among many in lending.
Not having a job, for example, could keep someone with an excellent credit score from getting a loan, said James Aldrich, chairman and chief executive of Delaware Place Bank, just off North Michigan Avenue. When Aldrich's bank overrides a credit score, however, it most often does so in favor of making a loan rather than denying one. And, even though the bank makes some loans that credit scores tell it not to, Delaware Place's large auto portfolio boasts an unusually small percentage of delinquencies. That performance is an exception, said Ken Williams, president of Moebs Services Inc. in Lake Bluff, a financial services research firm. In most cases, human lenders deny more loans than a credit-scoring system, and the loans they make tend to be worse, he said.