Jan 2019 | Credit Decisions

Assessing consumer borrowing

When assessing affordability, the more you know about an individual’s financial situation and behaviours the better. But to understand how their affordability might change over time, and how you can help them create a more secure financial future, you need to look at the outside factors affecting the way they spend, save and borrow, and consider the economy as a whole.

To say the economy has had a changeable few years would be an understatement. Not only are we still recovering from the aftermath of the worst recession since the war, we’ve now entered a period of uncertainty as we countdown to Brexit.

Over the last year, the UK has gone from being one of the fastest-growing G7 economies to the slowest. The economic recovery has lost momentum, partly due to a decline in consumer spending. And a combination of higher inflation and slow wage growth means household incomes are suffering.

Office for National Statistics data shows that real household disposable income growth slowed to 0.1% quarter-on-quarter in quarter four of 2017. This led to a 0.1% decline in real incomes on a per-head-basis.

Even though inflation is now beginning to fall (2.4% in April) and pay is growing (2.6% in the year to January – March), many of today’s households are still waiting to feel the benefit. Factor in the uncertainty surrounding Britain’s exit from the EU, and consumer spending is unlikely to pick up until there’s a more concrete improvement.

How the economy affects lending

Levels of personal debt are currently higher than they were a decade ago and people are borrowing more, for longer periods of time. We’re seeing more demand for loans of £20-£40k, and we’re also seeing a high proportion of early arrears in these loans. It’s vital that you understand the credit-risk implications of this, both from your own and our customers’ perspective.

It’s also important to note that while we have just faced a 25-basis point rise, another interest-rate increase is now thought to be likely within the next year.

Inevitably, this will create winners and losers. Households with savings and investments may see a marginal increase in the income earned, while those with mortgages and other types of loan are likely to see their repayments increase.

By integrating economic forecasts into your decision making you can get a better idea of how a person’s financial situation is likely to be impacted by changes like this. For a more granular view, you can use forecasts alongside bank account data – and even predict how an individual will navigate economic change by looking at past behaviour.  

Today, with more people opting for high-value personal loans and car finance, there’s an immediate need to consider the long-term impact of borrowing and ensure credit can be maintained. While it may not be appropriate to factor in economic data if you’re offering a short-term loan, if you’re a mortgage lender, or offering a larger loan over a longer period, or high value car purchases for example. Such fluctuations in interest rates make economic data a useful addition.

Rapid or dramatic changes to the economic climate, as we saw in the UK between 2007 and 2009, can also have an impact on the accuracy of credit scoring and scorecards. These are based on information obtained at a set period of time, and as time passes the variables used in a scoring model might no longer behave in the same way.

Here are some steps to consider in making the most informed, and appropriate, decisions:

1.Ensure your scorecards are up-to-date

Scoring and using scorecards can be hugely beneficial for a large proportion of people where a credit decision is straightforward. But only if the scoring model is reflective of the right data and relevant economic climate. Read more in our scorecards infographic.

2. Be prepared to ingest new data, such as open banking

To effectively use open banking data, you need the right tools. Aggregation, and then categorisation. You then need the ability to feed this data and insight from it, back into the decisioning process in order to automate decisions. Read more.

3. Trended data

A credit score is an effective way to view a snapshot of a consumer’s financial behaviour. But how did they get there? Is their score improving or has their payment behaviour changed recently? To really get a sense of your customer’s financial history and predict their future payment behaviour you need more information, covering more time and from more sources. That’s where we can help, read more.

4. AI and machine learning

For a long time now, automation has enhanced decisions bringing more efficiency. Today, with the growth in sophistication across AI, there is a new opportunity to enhance all decisions with the ability of self-learning and extraction of previously unseen income and variables. The best technology is fuelled by AI, and can bring significant opportunity to transform your decisions, moving you from segmentation to personalisation. Find out more.