Credit Scoring Primer
By Paul Snider
Recently I had the opportunity to review notes from the Credit Scoring Conference held in Washington, D.C., in July 1999. The notes from this conference clearly show once and for all why proper interviews are more important now than ever before. Credit scoring is completely uninvestigated, unregulated and unverified for accuracy, bias or legality as admitted by the Federal Reserve Board panelist present. If for no other reason than this it is imperative that customers be questioned about past credit problems and given a chance to explain changes in their life as opposed to your simply "weeding" potential buyers out because of credit scores that appear too low for financing.
Understanding the FICO score is very important. What does FICO mean? FICO is a score that was developed by Fair Isaac Company, a California based company specializing in the construction of scoring models. This score is a single number ranging from 350 to 900, and is calculated using past credit history data. Each bureau calls the score something different but the score it represents is the same no matter what bureau is used. The risk is defined in the number of accounts that default based on the score. Some examples are:
- Scores below 601 yield 8 good loans for each bad one
- Scores from 700-729 yield 129 good loans for each bad one
- Scores at or above 800 yield 1292 good loans for each bad one
- Loans reported on your customers that are reported in error or have recently been settled will impact the score; again a complete credit interview is imperative. There are 5 variable categories grouped by FICO.
- Previous Credit Performance
- Current Level of Debt
- Amount of time the credit has been in use.
- Pursuit of new credit
- Types of credit available
- Scores of zero (0) indicates either that no information was found, or that there was simply not enough credit history to generate a score. If the score is low there are a few things that can be done to improve it.
- Pay down any credit card balances to below 50% of the maximum credit allowed.
- Call all but two or three revolving accounts
- Limit the number of inquiries
- Pay all collection amounts
- Write dispute letters on any account that might not be accurate.
By better understanding scores and how they affect your customer it is much easier to structure loans that will be approved. It is also very important to understand each lenders internal guidelines as it pertains to FICO scores. Lenders often have levels that "knock" out customers below certain scores. Ask your lender for information on their policies in order for you to send applications that meet their standards.
How do we help customers gain approval and increase deliveries?
Conducting proper interviews has been the main difference between success and failure in numerous dealerships I have visited or trained. When interviews are conducted it allows the special finance director to receive higher approvals, better gross profits and quicker funding because all credit issues are dealt with up front while the customer is seeking approval and usually is more cooperative.
Credit interviews are quick and simple if handled properly. Remember the following rules for successful credit interviews:
Verify that all information on the credit application is complete and correct.
Ask questions about credit bureau accounts. Seek positive explanations on past experiences while looking for reasons why your lender should give this customer a chance.
Explain to customer the S.A.W method and how it will impact their loan. (Sincerity to re-establish credit, Ability to re-pay new credit and Willingness to pay on time going forward.)
Explain the rules you must follow to obtain loans for credit-impaired customers such as verification of employment, income, residence and discharged BK.
Seek information that provides ammunition for getting loan approval.
Explain that down payment affects the outcome of all loan applications, i.e.: customers with large down payments will most likely get approved more quickly than those with little to no real cash down.
During the interview recommend vehicle that fit well into the customers budget. Lenders prefer 18% payment to income in most cases.
I hope this helps explain the complex world of credit scoring and provides you new tools to achieve higher approvals, quicker funding and additional gross profit.
Paul Snider is President of VOISYS Systems Corporation, specializing in lead-generating services including 800 loan-by-phone and Internet applications. psnider@dealeronline.com
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