How to Estimate Probability of Default

The probability of default is similar to credit scoring and is taken into consideration by lenders before extending credit. Estimating the probability of default involves reviewing the applicant's financial history. Knowing how to estimate the probability of default will help a credit applicant determine if a lender will approve their application.

Instructions

1

Review a recent credit report. The credit report will show how an applicant usually repays debt. Check the number of debts on a credit report that have gone into default. Look for recent credit inquiries to get an idea of how much credit an applicant is trying to get.

2

Check the length of the applicant's credit history. Search for the oldest account on the credit report that is still open. This gives the lender an idea of how much experience the debtor has with paying credit accounts.

3

Search public records in the applicant's current or past states of residence. Some public records are found on credit reports, but if an applicant makes payment on judgments quickly, the information might not show up on a credit report. Check for judgments such as evictions or charges for writing bad checks or other financial related trouble. Perhaps most importantly, search for bankruptcy petitions.

4

Check an applicant's ability to repay their debt. Review recent payment stubs and bank statements to verify an applicant's income and available resources. Ask a credit applicant to provide a list of monthly bills and use the information to determine how much income the applicant has available each month after paying those bills.

5

Take the economy into consideration. It is not always possible to guess the ups and downs in the local economy, but the ability to anticipate economic changes helps with long-term probability of default estimates. Preparing for changes in the economy that may lead to unemployment or other financial difficulties is important when considering mortgage applications and other long-term loans.