What Are Credit Models?

Usually when people talk about Credit Models they are referring to "risk models" that are used by lenders to determine the likelihood of some person defaulting (failing to repay) on their loan.

A very simple example would be the following.  A certain bank will only loan money to people who have a Debt to Income ratio less than .75.  This is figured as follows: Monthly Expenses divided by Monthly Income = Debt to Income ratio.  Mr. Smith fills out a loan application and states that he has $800/month in payments and that he has $1000/month in income.  Using the model, his ratio is .8 - he would not qualify for the loan user this lender's risk model.

The world of finance and credit has come a long way. Gone are the days of simple investments by saving money and earning a small rate of interest on the amount. Today, the scope of investment is so vast and complicated that every penny set aside ends up reaching out to national and international needs. This in turn, attracts huge returns and adds to the myriad of products offered and consistently launched by the various financial institutions. The mediums via which these institutions extend credit to customers are referred to as credit models.

Credit models such as credit cards, different customized loans and products affiliated with the stock market are gaining immense popularity. People have become aware that the financial institutions take over the task of responsible reinvestment. The credit models offer the much needed funds, at an agreed future date of payment. Credit cards have opened new avenues for the so called 'middle class' of society, by making funds available to enhance their standard of living. Customized loans make it possible for anyone to own a house or a car or real estate. Products affiliated with the stock market enable the layman to be a part of the intriguing and alluring world of the 'bears and bulls'. The profitability possible through borrowed finance is within everyone's clasp today.