Arizona Real Estate License Practice Exam

Credit scoring in the context of lending refers to the numerical values assigned to qualify the borrower. These scores are generated through a systematic evaluation of a borrower’s credit history and financial behavior. Lenders use these scores to assess the risk of lending to a particular individual. A higher credit score generally indicates a lower risk, suggesting that the borrower is more likely to repay the debt on time.

The methodology behind credit scoring takes into account various factors such as payment history, amounts owed, length of credit history, types of credit used, and new credit inquiries. This quantitative assessment enables lenders to make informed decisions about whether to approve a loan, how much to lend, and what interest rates to offer.

Other options, such as the dollar amount of the loan or the review process by the underwriting department, while important parts of the lending process, do not define what credit scoring is. Credit scoring specifically focuses on the evaluation metric that influences lending decisions.