What is a scoring method?

The term "scoring" refers to a process in which scores are assigned on the basis of different individual statistical data. These scores make it possible to draw conclusions regarding the likelihood that a customer or business partner will make a payment when due. The scoring method is mentioned expressly in the amendments to the German Federal Data Protection Act. The revision of this legal provision included an express reference to the scoring method. The revision of this legal provision took effect on 1st April 2010.

The so-called scores form the cornerstone of the scoring method. They help companies to assess the financial risk of a customer's insolvency. As a result, scoring values provide important indications. They also permit forecasts regarding the likelihood that customers who have not yet been considered insolvent might default. To this end, credit agencies provide selected personal information from the scoring process to authorised companies. The system is increasingly used by companies operating in the so-called bulk businesses. This includes companies working in retail, telecommunications, mobile telephony, mail order companies, mortgage banks, savings banks or other credit institutions. Scoring methods provide an important control instrument here, with the aim of increasing the profitability of business relationships with customers.

 

Data recording in scoring processes

A customer's or company's score is derived from various individual data. The actual score is the result of recognised statistical analysis methods. Various sources of information form the basis of data collection. This includes the information from electronic payment systems as well as socio-demographic information on age or the current residence. A large part of the data material comes from contracts or transactions the customer has already concluded. In this connection, the consumer signs a declaration of consent expressly permitting the transfer of personal data.

In scoring processes, the customer's potential payment risk is assessed on an ongoing basis. Moreover, throughout the business relationship, the scoring system is continuously expanded with current data. 

In some fields, there is only little meaningful data material which can be used. In this case, external information is also included in the scoring process. These data, for example, comprise information by providers of marketing information or of special risk data. Furthermore, the scores established by the credit agency can be influenced by results of external scoring processes. Likewise, if needed, public directories or registers, such as e.g. the public debtors' list and the German Federal Gazette, can be used as an additional source of information.

Scoring methods only assess information and data that are important for a loan to be granted. All the data material must be proven to be important for the forecast. An external assessment of real-estate property is not relevant. Processing of information is strictly based on the legal provisions of data protection.  

Scoring data must be established using recognised mathematical-statistical or scientific systems. This is a legal requirement.

Basic score and industry score: The different types of scoring values

Scoring methods differentiate between the basic score and the industry score. An assessment scale of, e.g., between 1 and 100 forms the basis for determining the basic score. The higher the value is on that scale, the better the consumer's credit rating is. If the score is high, a positive business relationship is very likely. The basic score established using the scoring method forms the basis for the self-report which every consumer can obtain. 

The industry score is far more important commercially. It is established every day for different business fields. The industry score is an important scoring criterion for potential new business and cooperation partners. This scoring value permits a meaningful creditworthiness forecast. 

Credit scoring is a field of application of scoring methods. Banks or credit institutions use the scoring system in every type of loan business, as the score forms an important decision-making criterion in the granting of loans. Credit scoring provides information on the borrower's ability to fulfil the financial liabilities under a given contract.

Benefits of scoring processes

Scoring processes are an important decision-making criterion for the conclusion of contracts, as companies often suffer financial losses because of consumers' insolvency. These costs are then inevitably imposed on other consumers through higher prices. As a result, scoring processes also benefit the general public because they protect all consumers against higher prices by preventing bad debts for the companies.