Numerical Points Systems in Credit Screening

The development of numerical points systems, or credit scoring systems, have become increasingly important in this country as aids in the credit screening process. Most of the initial research on these techniques has been undertaken in the US, but in the last decade the principles have been used in this country, particularly by financial institutions operating in the consumer credit field. In broad terms, numerical points systems attempt to discriminate potentially bad from potentially good credit risks and offer an alternative to a purely subjective assessment of a credit applicant. The systems are particularly relevant in the consumer credit field where most of the information needed can be obtained from a credit application form. Under the system, numerical weights are assigned to certain types of information given (e.g. occupation, income, marital status, etc.), the total of the scores then being used as a measure of payment potential: the higher the score, the more likely is the applicant to possess characteristics which indicate a prompt payment disposition. In this article, it is emphasised that the construction of a numerical points system fits into the overall credit screening process, and it is important to appreciate the principles of the latter before full use can be made of any system. The empirical research is summarised both in the US and in the UK with a view to assessing the effectiveness of the systems, and a survey amongst UK financial institutions is also summarised to evaluate the extent of the use of the techniques in the UK. Emphasis throughout has been placed on the consumer credit field but the principles can also be applied to trade credit.