How It Works: Credit Scores and Our Lending Decisions

How It Works is an ongoing series here on our blog, exploring and demystifying topics about which we hear often from our members and the public. Today, we’re taking a look at how credit scores play into our lending decisions.

Updated 5/15/20

Credit scores play a large role in personal finance today. However, many people don’t really understand why or how they’re utilized by a financial institution when making a lending decision. We want to help change that, and provide some insight into how credit scores work at SoFi.

First, some history. The first commercially available credit score was created in 1989 by the Fair Isaac Corporation (FICO® — hence the acronym) to provide banks and other lenders with an analytics-based view into an individual’s financial picture across the three major credit bureaus (Experian, TransUnion, and Equifax).

It’s not administered by the government, and it’s not the only credit scoring system, but it is the dominant one used by most lenders . VantageScore was established in 2006 as a joint effort across the three major credit bureaus. Here at SoFi, we use FICO® Scores or VantageScore as part of our lending decisions.

The upside of using such scores is clear: they’re data-based, which means lenders aren’t making decisions rooted in human biases. The downside, of course, is that one error on a credit report, or one financial misstep, can drag any credit score down and prevent consumers from being able to get a loan or a new credit card.

Credit scores help lenders quickly summarize how a potential borrower manages their credit. FICO® and VantageScore are components of lending decisions at SoFi, but they’re only one part.

When someone submits their pre-qualified information to us for a loan, depending upon the product applied for, our underwriting algorithm, inclusive of the credit scores mentioned above, performs an initial loan review for that product based on a set of rules determined by our Credit Committee and the type of product someone is applying for.

Although lending guidelines and algorithm rules can vary based on product, they generally break down into two common areas:

•  Ability to pay: This reflects income, any debt, and for some programs, certain living expenses. The most important question SoFi tries to answer is common sense: does a person have enough money each month to meet their existing financial obligations and make a new SoFi payment? This calculation can differ by product and may also differ by lenders other than SoFi.

•  Credit history: When we review credit history ‒ that is, credit scores, the number of current loans someone have, payment and inquiry history, and how long someone’s used credit responsibly ‒ we are taking a look at how an applicant manages credit. Negative marks on a consumer’s credit history, known as “derogatories,” could hurt their chances of being approved because having a history of mismanaging credit could be an indicator of future payment performance.

As we continue to innovate new technology and optimize our algorithms, we’ll get even better at understanding someone’s holistic financial picture with this same basic information as a foundation. And by gaining a better understanding, we can continue to offer great rates, great customer service, and exclusive member benefits.

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