Technology is evolving quicker than ever, legislation is continually reviewed, renewed and added too and the economy changes daily. This world of continuous change affects us all and, whether consciously or subconsciously, it can significantly impact behaviours. How? Priorities and outlook can change. From a financial perspective, spending patterns are often revised, and the desire and attitude towards credit fluctuates and alters, impacting how it is used.
Given this continual change, in economy but also behaviour – how, as a lender, do you ensure you are always making the right decisions?
It is imperative that credit scores are working collaboratively and harmoniously with lending decision strategies. This will enable the right decisions and facilitate responsible lending. A credit score is often a key driver in decisions to assess the credit risk of an individual. The score is created by passing information on an individual through a scorecard, which quite often is bespoke to the lender. Turning your credit report into your credit score can be quite complex.
Effective scorecards must be in-line with up-to-date data trends. To illustrate how trends change over time, let us consider the example of Credit Account Previous Searches (CAPS) information. Twenty years ago a customer with 2 or more recent credit searches would have been considered higher risk. However, in today’s society, customers search for the best deal, they look for promotional offers and so it’s not uncommon for consumers to have a number of searches. A scorecard that does not reflect this could result in low risk customers being rejected for credit unnecessarily.
The key to ensuring that a credit scorecard is working in line with expectations is to monitor it. Monitoring it will take into account how well the score ranks customers in terms of risk, how the data trends have changed and how the portfolio differs over time. If the profile of a lender’s portfolio doesn’t change then chances are the scorecard will remain a powerful tool, but if the profile begins to differ then the scorecard will become less effective and will need to evolve.
Experian’s suites of scorecards are continually monitored. The results are shared with users of the scores. If there are any significant changes then the lender has the necessary information to review their process. This will help ensure that they continue to lend appropriate amounts to the right people. Monitoring bespoke scorecards is also important. If the behaviour of customers is changing, or if the type of customer that’s applying evolves, it’s important that this is accounted for in the decision making process.
In addition, when there is evidence of significant changes in a customer’s profile, or a customer’s behaviour, then it is important to refresh scorecards too. There are a number of ways this can be done, but the most common method is to develop a brand new scorecard. Experian develops and releases generic scorecards regularly and works with lenders to rebuild their bespoke scorecards. This helps to make sure that decisions are being made based on the most relevant data and the most up-to-date view of the customer profile. This in turn allows for responsible lending.
The world around us is changing, and it’s important that credit decision strategies change with it.