Many advantages - but also many prejudices

In the scoring process, forecasts which are to be as reliable as possible are made based on experience gathered in the past.

Forecasts are estimates regarding possible events or trends and we all make them, e.g. when we choose a hotel for our holidays. Based on our budget, we will decide in favour of the hotel we expect to be the nicest for our holidays. We know what we find important and base our decision on our experience from earlier holidays.

Scoring: Tried and tested method with a major benefit

Scoring is the same thing. The question is: What is the probability of a certain event occurring (in this case, having a nice holiday)? In order to ascertain probabilities of occurrence as precisely as possible, relevant data is acquired and statistically evaluated in computers, e.g. in medicine, meteorology or the insurance industry. Forecast models are then created based on this. This allows doctors to assess the risk of a heart attack or a stroke, meteorologists to determine the danger of a thunderstorm and insurance companies to estimate the probability of a claim.

Credit scoring: objective decision support

The aim of credit scoring is to determine the probability of a person meeting its payment obligations in the future. It is an indispensable element of the German economic system and of essential importance to the credit services sector and consumers alike. On the one hand, scoring protects enterprises against non-payment and consumers against over-indebtedness and, on the other, it enables lending to persons that would otherwise not be granted a loan based on primarily subjective judgements.

Without scoring, there would be less loans or higher credit default rates which would result in higher borrowing costs for consumers. Scoring enables lending to groups of persons that without scoring would be rated across the board as a too high risk (Centre for European Economic Research, study "Focus on Scoring - Economic Significance and Legal Framework in an International Comparison"). In addition, credit scores do not include any subjective - and hence possibly discriminating - factors such as origin, religion or handicap.

A component in the decision-making process

Credit scores are calculated by credit bureaus and frequently they are industry-specific forecasts. The probability that a car purchase loan will be serviced according to contract may differ from that of payment being made in the case of a purchase on account. Many companies incorporate scores provided by credit bureaus into their own decision-making models. In the case of a bank, information may be incorporated which the customer has provided in the credit application, as well as such information which the bank already has about a long-standing customer.