Consumers’ credit scores get a lot of play when it comes to assessing finances and credit risk. Based on a formula that combines loan and repayment history, credit scores are often viewed as “make-or-break” indictors for loan approval.
Although credit scores are undoubtedly useful in determining loan risk, they traditionally have been just one piece of the overall puzzle financial institutions (FIs) look at when considering loan applications. Factors such as employment history, proof of income and debt-to-income ratio have all played key roles in determining whether to grant or deny loans.
Recent research suggests it’s worthwhile for FIs to consider other valuable indicators of a consumer’s overall financial health when making loan decisions. A recent American Banker article recommends lenders measure a consumer’s financial health by eight important factors. I’ve highlighted a few of those below.
- Credit score — This remains an essential component of assessing an applicant’s loan risk.
- Ability to live within their means — This “no brainer” piece of the puzzle speaks volumes about a consumer’s sense of financial responsibility.
- Timely and full bill repayment — Just as time management is an essential skill employers look for in new hires, bill payment management is a vital gauge of financial health.
- Sufficient insurance — This can be an invaluable marker of a loan applicant’s ability to “bounce back” in the face of unforeseen life and financial hardships. The buoyancy adequate insurance affords can mean the difference between sinking financially and staying afloat.
- Forward-looking behaviors— A potential borrower’s ability to prepare for future expenses is a great barometer for measuring their current and potential financial well-being.
