Advantages of using credit risk scorecard

Many financial institutions such as banks utilize credit risk scorecards in order to assess a credit company’s performance in credit risk handling. A scorecard can easily be obtained from a credit card vendor. These vendors develop scorecards so that they can be utilised in the lending business. But, in-house scorecards for credit risks have now replaced scorecards for credit risks obtained from exterior sources. Technological advancements have aided the development of scorecards for credit risks within a lending firm.

The benefit of having in-house scorecards for credit risk is that their development is faster and inexpensive. As the development of the scorecard is done within the organisation, there is far more flexibility with respect to its creation. Software applications advancement is the main factor that facilitated the shift to in-house scorecard development for credit risks assessment in lending firms. A number of individuals have the required knowledge in using software as well as products of information technology. Also, software applications are readily available in the market today. It is no longer a requirement for firms to make huge investments in infrastructure. Moreover, work is being outsourced from almost all the firms. Software applications are being used as an alternative to employing advanced programmers. This is because these applications are quite user friendly and require training for only a short term so that the user can develop scorecards.

Technological advancements in the data storage industry have reduced the load of compiling data. Moreover, lending firms also realise the advantages of developing an in-house scorecard for credit risk. This has led to the credit-risk metric development. Credit risk scorecards are seen as mathematical models designed for accessing risks that are associated with the extension of debt derivatives and instruments. This also helps in quantifying credit risks and also helps in determining the capital amount that needs to be held as reserve with the intention that lending companies can maintain their financial stability and solvent state.

Credit risk is said to be the possibility of loss that lending firms face when a debtor defaults in payment. Statistical data are used for the assessment of credit risk. The credit ratings as well as credit score are used as tools for measuring credit risks that could come from each borrower.

Two metrics are integrated in the scorecard for credit risk. They are Economic Capital and Expected Loss. Expected Loss is defined as the probability of the amount of loss in each period that should be anticipated by a credit firm. An Economic Capital is defined as the amount of resources that should be allocated by a credit firm in order to cover losses.

The capacity of a lending firm to determine the credit risks brings about improvement in their capability of risk management. The scorecards for credit risks act as tools for managing credit risks. It also acts as a system employed by lending companies so that the credit risk level can be measured and the amount to be held as reserve can be determined.

Contact one of our helpful account representatives to assist you in the setup of a high risk merchant account or offshore merchant account for a high risk merchant.