Posted in Finance, Accounting and Economics Terms, Total Reads: 240
Definition: Credit Level
Credit level is the statistical technique which is used for determine the credit worthiness of a borrower. This score is an indication of whether the credit should be given to the borrower or not. Determining the credit level of a person is considered a better and a more accurate estimate of assessment rather than analysing it through qualitative techniques for assessment of an individual’s credit worthiness, as it is based on factual data.
When determining the credit scoring, all the relevant parameters which most significantly impact the credit worthiness are analysed from a sample of relevant people. This set of relevant people may be formed either from the current debtors, or another set of similar people. Once all the relevant factors and their importance have been determined, a model is established using these factors. Now the credit level is calculated using these model. This credit level is a number which gives an indication of the credit worthiness of the new applicant.
The model is used by the officer. All the applicant specific information for each variable is input into the model to find a credit level which can give an indication of the credit worthiness of the applicant. The development of credit scoring model is a tedious and time consuming task since the creditors have to consider a large sample and analyse different variables. Thus, the development of these models take place at the organizational level rather than at an individual level. Parameters like number of credit accounts, outstanding debt, credit history, income, age etc. are taken into account when developing the credit scoring model. In order to ensure the equality of credit in accordance with the Equal Credit Opportunity Act, parameters like race, marital status, sex, religion and national origin are not taken into consideration.