Consumer Credit Scoring Workshop

Today’s programme
• Introduction to credit scoring • Overview of Experian’s bureau data and how

it influences a credit score for credit

• Reviewing and underwriting an application • The key implications of the Guide to Credit • Overview of why monitor scoring?

Scoring 2000 and how to deal with declines

Introductions
Setting today’s objectives

Consumer Credit Scoring Workshop

Introduction to credit scoring

Overview of credit scoring
Common questions…

?

• What is credit

scoring? scoring?

• Why use credit

?

• 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 Owner Renter L.W .P. +27 -15 0 # Searches last 6 months 0 1 2 3+ Age of applicant to 20 21 - 25 26 - 40 41 -65 -19 -10 0 +23 Plus many others +17 0 -27 -51

Telephone no. given Yes No +15 -15

66+ Policy reject

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 Odds

good/bad odds

Score

All scorecards are built 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

good/bad odds profit

• Marginal

5:1

800

Score

All scorecards are built 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

Score

All scorecards are built 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
Good Bad Odds
Decline Refer Accept

• Marginal profit • Setting a cut-

Low Limit

Average Maximum Terms Facilities

off
• Tailor services
Terms x Marketing x Services x Interest rates scorecards are built
x

No Promote Regular Promotion Promotion

750

850

Score

All using Sigma, Experian’s state of the art scorecard building and analysis tool

How to use credit scoring Example: Motor Finance
Good Bad Odds

0 1 4 2 3
Score Score

Decline Max Loan £5,000 Max Terms 36 months Interest 15% Max Loan £10,000 Max Terms 36 months Apr 12.5% Max Loan £15,000 Max Terms 48 months Apr 10% Max Loan £25,000 Max Terms 48 months Apr 8%

0 1 2 3

4

Bespoke scoring
Who for ....
• Clients specific

scorecard

SCORING

• Large sample (>2,500

goods, bads, indeterminates and declined accounts)

BESPOKE

GENERIC

• 2 years history required • 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 INFORMATION FILE

one simple highly predictive

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 arrears or in default? Does your applicant have lots of new CAIS accounts?

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

CREDIT SCORE

Has your applicant been applying for credit recently? How often and 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 current address

47 years old

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 (Credit Account Information Sharing) affairs?
• 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
x

Active account arrears > 3 months High number of recently opened accounts High outstanding balance No active accounts in arrears

x

x

x

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 points

- 100 points

How bureau characteristics affect the score?
Default score 800

+ 30 points

- 200 points

- 150 points

- 100 points

+ 50 points

How bureau characteristics affect the score?
Default score 800

+ 30 points

- 200 points

+ 40 points

- 150 points

- 100 points

+ 50 points

Has your applicant had their house repossessed?
• Established in 1989 • Repossession register • Closed user group • Provides application address • May provide forwarding

address years

• Records are retained for 6

How credit active is your applicant?
(Credit Application Previous Search) last 12 months
• Application information on:
x

• Record of previous credit searches within the

Applicant Application details

x

• Helps to identify over-omitted and fraudulent

applications

How bureau characteristics affect the score?
Default score 800

+ 30 points

- 70 points

- 200 points

+ 40 points

- 150 points

- 100 points

+ 50 points

How bureau characteristics affect the score?
Default score 800

+ 30 points

- 70 points

- 200 points

Delphi score = 400

+ 40 points

- 150 points

- 100 points

+ 50 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

• Lenders by law must have

consent from a consumer before carrying out a credit search

co No

ent ns

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 sharing of information prevention of fraud customer management

YE

S

Written or verbal declines

The art of rejection - how to say “no”

• 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? List reasons as to why you may decline an applicant.

2.

Explanations of credit scoring and how it works...
• Credit scoring measures the statistical

probability that credit will be satisfactory repaid 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

• Credit scoring systems allocate points to

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 - Over commitment - Home ownership (for a secured loan) - Under age - Not employed - Existing account performance

• A decline based on specific company policies

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
Monitor/ Evaluate Tune/Build Scorecards and Strategies

Implemen

Why use monitoring?
• Ensure scorecard

performs optimally

Dynamic delinquency
Application 3 months Date
Q3 2000 3.6% Q4 2000 3.7% Q1 2001 3.5% Q2 2001 Q3 2001 Q4 2001 1.3%

Age of account
6 months 9 months 12 months

0.5% 0.5% 0.6% 0.5% 1.4%

1.1% 1.2% 1.3% 1.2% 2.3%

2.0% 2.2% 2.1% 2.0%

Dynamic delinquency
Application Date 3 months
Q3 2000 3.6% Q4 2000 3.7% Q1 2001 3.5% Q2 2000 Q3 2001 Q4 2001

Age of account
6 months 9 months 12 months

0.5% 0.5% 0.6% 0.5% 1.4% 1.3%

1.1% 1.2% 1.3% 1.2% 2.3%

2.0% 2.2% 2.1% 2.0%

New communication strategy

Misalignment report
Residential Status Score to 850 851-900 901-950 951-1000 1001+ Owner 2:1 5:1 8:1 12:1 22:1 Tenant 1:1 2:1 4:1 9:1 17:1 LWP 3:1 4:1 7:1 14:1 21:1 Other 2:1 4:1 7:1 12:1 20:1 Total 2:1 4:1 7:1 13:1 21:1

Misalignment report
Residential Status Score to 850 851-900 901-950 951-1000 1001+ Owner 2:1 5:1 8:1 12:1 22:1 Tenant 1:1 2:1 4:1 9:1 17:1 LWP 3:1 4:1 7:1 14:1 21:1 Other 2:1 4:1 7:1 12:1 20:1 Total 2:1 4:1 7:1 13:1 21:1

Why use monitoring?
• Ensure scorecard performs

optimally • Identify changes in applicant profile

Applicant population stability
Marital status Married Single Widowed Divorced Separated Development 54 32 3 9 2

% of Applicants Current 48 41 3 7 1

Applicant population stability
Marital status Married Single Widowed Divorced Separated Development 54 32 3 9 2

% of Applicants Current 48 41 3 7 1

-11% +27%

Why use monitoring?
• Ensure scorecard performs

optimally
• Identify changes in applicant

profile
• Identify sources of good/bad

business

Source of business
Application Date 00 00 00 01 Q2 Q3 Q4 Q1 % From Direct Mail 37 39 38 39 29 30 31 % From Media Advertising 63 61 62 61 71 70 69

New Communications Strategy

01 Q2 01 Q3 01 Q4

Source of business
Application Date 00 00 00 01 Q2 Q3 Q4 Q1 % From Direct Mail 37 39 38 39 29 30 31 % From Media Advertising 63 61 62 61 71 70 69

New Communications Strategy

01 Q2 01 Q3 01 Q4

(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 Not referred Referrals Age <21 Unemployed Address not confirmed Total 14,000 1,000 500 500 16,000 # Rejects 6,000 1,000 500 1,500 9,000 Reject rate 30% 50% 50% 75%

Sign up to vote on this title
UsefulNot useful