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Consumer Credit Scoring

Workshop
Today’s programme
• Introduction to credit scoring
• Overview of Experian’s bureau data and how
it influences a credit score
• Reviewing and underwriting an application
for credit
• The key implications of the Guide to Credit
Scoring 2000 and how to deal with declines
• Overview of why monitor scoring?
Introductions
Setting today’s objectives
Consumer Credit
Scoring Workshop
Introduction to credit scoring
Overview of credit scoring
Common questions…
• What is credit

?
scoring?

• Why use credit


scoring?

? • How we use credit


scoring within our
business?

? • When do we use
bespoke and generic
scorecards?
What is credit scoring?

Credit scoring calculates the


statistical probability that an
account will fall into arrears
What is credit scoring?
Credit scoring calculates the statistical
probability that an account will fall into
arrears

Bad Rate

Low Score High


Example Scorecard

Residential status # Searches last 6 months


Owner +27 0 +17
Renter -15 1 0
L.W .P. 0 2 -27
3+ -51

Age of applicant Telephone no. given


to 20 -19 Yes +15
21 - 25 -10 No -15
26 - 40 0
41 -65 +23
66+ Policy reject Plus many others
Why use credit scoring?
Some benefits of scoring for a
business …

• Increased confidence in the decision


process
• Added automation in decision process -
objective and consistent
• Reduce arrears
• Reduce bad debt/write off
• Improve quality of portfolio
• Improve profitability of business
How to use credit scoring
Use of…

• Score by
good/bad
Good Bad odds
Odds

All scorecards are built


Score using Sigma, Experian’s
state of the art scorecard
building and analysis tool
How to use credit scoring
Use of…

• Score by
Good Bad good/bad
Odds odds
• Marginal
profit

5:1

800 All scorecards are built


Score using Sigma, Experian’s
state of the art scorecard
building and analysis tool
How to use credit scoring
Use of…

• Score by
good/bad odds
• Marginal profit
Good Bad
Odds
Decline Accept • Setting a cut-
off

800 All scorecards are built


using Sigma, Experian’s
Score
state of the art scorecard
building and analysis tool
How to use credit scoring
Use of…
• Score by
good/bad odds

Good Bad
Decline Refer Accept • Marginal profit
Odds • Setting a cut-
Low AverageMaximum
Limit Terms Facilities
off
• Tailor services
No Promote Regular ◆Terms
Promotion Promotion ◆ Marketing

◆ Services

750 850 Allscorecards are built


◆ Interest rates
Score using Sigma, Experian’s
state of the art scorecard
building and analysis tool
How to use credit scoring
Example: Motor Finance

Good Bad 0 Decline


Odds Max Loan £5,000
1 Max Terms 36 months
Interest 15%

0 1 2 3 4 Max Loan £10,000


2 Max Terms 36 months
Apr 12.5%

3 Max Loan £15,000


Max Terms 48 months
Apr 10%

Score
Score 4 Max Loan £25,000
Max Terms 48 months
Apr 8%
Bespoke scoring

Who for ....

• Clients specific
scorecard
• Large sample (>2,500
SCORING
goods, bads,
indeterminates and
declined accounts)
• 2 years history required
BESPOKE GENERIC
• Delphi included as a
scorecard characteristic
Generic scoring
Who for....

• New products
SCORING • Evolving markets
• Small portfolios
• Limited data for analysis
• Fast implementation
BESPOKE GENERIC
Europe’s largest consumer
database

Combining elements of
Europe’s largest credit
bureau to provide
PUBLIC one simple highly predictive
INFORMATION
FILE Delphi SCORE
Experian’s bureau data used
in credit scoring
Experian bureau data

PUBLIC
INFORMATION
FILE
Key bureau
questions
Key bureau questions
Is your
applicant
confirmed
on the
electoral
roll?
Key bureau
questions
Is your
applicant
confirmed
on the
electoral
roll?

Does your
applicant
have any
CCJs? If so
how recent
and for how
much?
Key bureau
questions
Is your
applicant
confirmed
on the
electoral
roll?

How is your applicant paying his


CAIS accounts? Are they in
arrears or in default? Does you
applicant have lots of new CAIS
accounts?

Does your
applicant
have any
CCJs? If so
how recent
and for how
much?
Key bureau
questions
Is your
applicant
confirmed
on the
electoral
roll?

How is your applicant paying his


CAIS accounts? Are they in Has your applicant been
arrears or in default? Does your applying for credit
applicant have lots of new CAIS recently? How often and
accounts? for what type of credit?

Does your
applicant
have any
CCJs? If so
how recent
and for how
much?
Key bureau
questions
Is your
applicant
confirmed
on the
electoral
roll?

How is your applicant paying his


CAIS accounts? Are they in Has your applicant been
CREDIT
arrears or in default? Does your SCORE applying for credit
applicant have lots of new CAIS recently? How often and
accounts? for what type of credit?

Does your
applicant
have any
CCJs? If so
how recent
and for how
much?
… introducing Mr Jones

17 years at 47 years old


current address

Married Home owner


How bureau characteristics
affect the score?

Default
score
800
Is the address traceable?

• Most comprehensive address database in the


UK

• 24 million addresses

• Validates postcode and address

• Updated every 13 weeks


Is your applicant living at the
address declared and for how
long?

• Helps to confirm the names and addresses of UK


resident voters
• Collated from 462 local authorities annually
• October 10 is the “cut-off“ date
• Are they on the voters roll at their
current or previous address?
How bureau characteristics
affect the score?

Default
score
800
+ 30
points
Are there any records of public
information for your applicant?

• 31 types of public information


• Information held for six years from date of entry
• How recent are the CCJs and for how much?
• Risk indicator

PUBLIC
INFORMATION
FILE
How bureau characteristics
affect the score?

Default
score
800
+ 30
points

- 200
points
Is there a fraud warning
attached to your applicant’s
address?
CIFAS The UK’s Fraud Prevention Service
• The decision initially must be a REFER
• Established in 1988 to share fraud experiences
• Warning attached to an address - fraudsters
often use different names
• Obtain details from supplying member
• 9 categories of fraud eg.
- empty house = 1
- impersonation = 2
• Experian host the information
How has your applicant been
conducting their financial
affairs?
(Credit Account Information Sharing)
• Launched in 1983 - promote responsible lending
• Information provided on the: borrower, lender, credit
account
• 4 types of accounts - Active, Settled, Default and
Delinquent
• Characteristics looked at for example
◆ Active account arrears > 3 months
◆ High number of recently opened accounts
◆ High outstanding balance
◆ No active accounts in arrears
How bureau characteristics
affect the score?

Default
score
800
+ 30
points

- 200
points

- 150
points
How bureau characteristics
affect the score?

Default
score
800
+ 30
points

- 200
points

- 150 - 100
points points
How bureau characteristics
affect the score?

Default
score
800
+ 30
points

- 200
points

- 150 - 100 + 50
points points points
How bureau characteristics
affect the score?

Default
score
800
+ 30
points

- 200 + 40
points points

- 150 - 100 + 50
points points points
Has your applicant had their
house repossessed?
• Established in 1989
• Repossession register
• Closed user group
• Provides application address
• May provide forwarding
address
• Records are retained for 6
years
How credit active is your
applicant?
(Credit Application Previous Search)
• Record of previous credit searches within the
last 12 months
• Application information on:
◆ Applicant
◆ Application details
• Helps to identify over-omitted and fraudulent
applications
How bureau characteristics
affect the score?

Default
score
800
+ 30 - 70
points points

- 200 + 40
points points

- 150 - 100 + 50
points points points
How bureau characteristics
affect the score?

Default
score
800
+ 30 - 70
points points

Delphi score
- 200 = 400
+ 40
points points

- 150 - 100 + 50
points points points
Are there any financial associations
or aliases for your applicant?
• Identifying financial associations through:
- Joint applications for credit
- Joint accounts

• Is your applicant known by any


other name?
- Maiden name

• Supplied by you the lender


Guide to Credit Scoring 2000
and the art of rejection
Notification and consent

• Lenders are encouraged to tell


applicants that credit scoring may be
used as part of the decision making
process

en t
• Lenders by law must have c ons
consent from a consumer No
before carrying out a credit
search
Notification and consent
.
I/we agree that the Acceptance Bank may
search the files of a credit reference agency
which will keep a record of that search.
Details of how I /we conduct the account may
also be disclosed to the agency.
This information may be used by other lenders
in assessing applications from me/us and
members of my/our household and for
occasional debt tracing and fraud prevention.

Data protection guidance on credit referencing


Consent - saying “yes” to...
credit search

storing data

YE
sharing of information S

prevention of fraud

customer management
The art of rejection - how to say
“no”
Written or verbal declines

• Tell them credit scoring has been used


• Provide a simple explanation of how it works
• Provide a principal reason for decline
- Without jeopardising the security
of your scorecard
or
- Running the risk of fraud
Group exercise

1. How would you


explain to a customer
what credit scoring is?

2. List reasons as to why


you may decline an
applicant.
Explanations of credit
scoring and how it works...
• Credit scoring measures the statistical
probability that credit will be satisfactory
repaid
• Credit scoring systems allocate points to
various pieces of information given on your
application form such as your age, whether
you own your home and to information
provided by a CRA. These points produce your
credit score and help to predict whether you
are an acceptable risk
Principal reasons for decline
• A decline based on a low credit score
• A decline based on information held at a credit
reference agency - tell them which one you
used and how to go about applying for a copy
of their file
• A decline based on specific company policies
- Over commitment
- Home ownership (for a secured loan)
- Under age
- Not employed
- Existing account performance
Review of refusals and
complaints
• A rejected applicant must be
informed of the proper procedures if
appealing on a decision based on a
credit score
• Credit grantors should reconsider
the application if relevant
additional information supplied
• A different lending officer
should review the application
Review of refusals and
complaints
• Designated officer in place for
appeals - authority to override the
original decision
• Credit grantors should keep their
appeals procedures under continual
review
• Credit grantors should establish
complaints procedures and inform
customers about them if they wish
to complain
Summary

• Credit scoring is the fastest and fairest way of


making a decision

• A low score is not always adverse CRA data

• Don’t be secretive, be open and honest

• Take responsibility for the decision


Why use monitoring?
Integrated solutions
Tune/Build
Monitor/
Scorecards and
Evaluate
Strategies

Implemen
Why use monitoring?
• Ensure scorecard
performs optimally
Dynamic delinquency
Age of account
Application
Date 3 months 6 months 9 months 12 months

Q3 2000 0.5% 1.1% 2.0%


3.6%
Q4 2000 0.5% 1.2% 2.2%
3.7%
Q1 2001 0.6% 1.3% 2.1%
3.5%
Q2 2001 0.5% 1.2% 2.0%

Q3 2001 1.4% 2.3%

Q4 2001 1.3%
Dynamic delinquency

Application Age of account


Date 3 months 6 months 9 months 12 months

Q3 2000 0.5% 1.1% 2.0%


3.6%
Q4 2000 0.5% 1.2% 2.2%
3.7%
Q1 2001 0.6% 1.3% 2.1%
3.5%
Q2 2000 0.5% 1.2% 2.0%

Q3 2001 1.4% 2.3%

Q4 2001 1.3% New communication


strategy
Misalignment report
Residential Status
Score Owner Tenant LWP Other Total

to 850 2:1 1:1 3:1 2:1 2:1

851-900 5:1 2:1 4:1 4:1 4:1

901-950 8:1 4:1 7:1 7:1 7:1

951-1000 12:1 9:1 14:1 12:1 13:1

1001+ 22:1 17:1 21:1 20:1 21:1


Misalignment report

Residential Status
Score Owner Tenant LWP Other Total

to 850 2:1 1:1 3:1 2:1 2:1

851-900 5:1 2:1 4:1 4:1 4:1

901-950 8:1 4:1 7:1 7:1 7:1

951-1000 12:1 9:1 14:1 12:1 13:1

1001+ 22:1 17:1 21:1 20:1 21:1


Why use monitoring?

• Ensure scorecard performs


optimally
• Identify changes in
applicant profile
Applicant population
stability
% of Applicants
Marital status Development Current

Married 54 48

Single 32 41

Widowed 3 3

Divorced 9 7

Separated 2 1
Applicant population
stability
% of Applicants
Marital status Development Current

Married 54 -11% 48

Single 32 +27% 41

Widowed 3 3

Divorced 9 7

Separated 2 1
Why use monitoring?

• Ensure scorecard performs


optimally
• Identify changes in applicant
profile
• Identify sources of good/bad
business
Source of business
Application % From % From Media
Date Direct Mail Advertising
00 Q2 37 63
00 Q3 39 61
00 Q4 38 62
01 Q1 39 61
New Communications Strategy
01 Q2 29 71
01 Q3 30 70
01 Q4 31 69
Source of business
Application % From % From Media
Date Direct Mail Advertising
00 Q2 37 63
00 Q3 39 61
00 Q4 38 62
01 Q1 39 61
New Communications Strategy
01 Q2 29 71
01 Q3 30 70
01 Q4 31 69
(Ave score = 950) (Ave score = 910)
Why use monitoring?

• Ensure scorecard performs


optimally
• Identify changes in
applicant profile
• Identify sources of
good/bad business
• Referral analysis
Referral analysis
# Accepts # Rejects Reject rate
Not referred 14,000 6,000 30%

Referrals
Age <21 1,000 1,000 50%
Unemployed 500 500 50%
Address not 500 1,500 75%
confirmed

Total 16,000 9,000