Upload
enselsoftwarecom
View
647
Download
3
Embed Size (px)
DESCRIPTION
What is Credit Scoring
Citation preview
Consumer Credit Scoring Workshop
Today’s programmeToday’s programme
• Introduction to credit scoringIntroduction to credit scoring
• Overview of Experian’s bureau data and how Overview of Experian’s bureau data and how it influences a credit scoreit influences a credit score
• Reviewing and underwriting an application Reviewing and underwriting an application for credit for credit
• The key implications of the Guide to Credit The key implications of the Guide to Credit Scoring 2000 and how to deal with declinesScoring 2000 and how to deal with declines
• Overview of why monitor scoring?Overview of why monitor scoring?
IntroductionsIntroductionsSetting today’s objectivesSetting today’s objectives
Consumer Credit Scoring Workshop
Introduction to credit scoringIntroduction to credit scoring
Overview of credit scoringOverview of credit scoringCommon questions…Common questions…
• What is credit scoring?What is credit scoring?
• Why use credit Why use credit scoring?scoring?
• How we use credit How we use credit scoring within our scoring within our business? business?
• When do we use When do we use bespoke and generic bespoke and generic scorecards?scorecards?
??
?
What is credit scoring?What is credit scoring?
Credit scoring calculates the Credit scoring calculates the statistical probability that an statistical probability that an account will fall into arrearsaccount will fall into arrears
Bad Rate
Credit scoring calculates the statistical probability that an account will fall into arrears
What is credit scoring?What is credit scoring?
Low HighScore
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
Example ScorecardExample Scorecard
Why use credit scoring?Why use credit scoring?
• 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
Some benefits of scoring for a business …
Use of…Use of…
All scorecards are built using Sigma, Experian’s state of the art scorecard building and analysis tool
• Score by Score by good/bad good/bad oddsodds
Score
Good BadOdds
How to use credit scoring
All scorecards are built using Sigma, Experian’s state of the art scorecard building and analysis tool
• Score by Score by good/bad good/bad oddsodds
• Marginal Marginal profitprofit
Use of…
Score
Good BadOdds
800
5:1
How to use credit scoring
All scorecards are built using Sigma, Experian’s state of the art scorecard building and analysis tool
• Score by good/bad odds
• Marginal profit
• Setting a cut-off
Score
Good BadOdds
800
Decline Accept
Use of…
How to use credit scoring
All scorecards are built using Sigma, Experian’s state of the art scorecard building and analysis tool
• Score by good/bad odds
• Marginal profit
• Setting a cut-off
• Tailor services Terms Marketing Services Interest rates
Score
Good BadOdds
Decline Accept
Low Limit
No Promotion
Refer
AverageTerms
Promote RegularPromotion
750 850
MaximumFacilities
Use of…
How to use credit scoring
Score
How to use credit scoring Example: Motor Finance
Score
Good BadOdds
0 1 2 3 4
DeclineDecline
Max Loan Max Loan £5,000£5,000Max Terms Max Terms 36 months36 monthsInterestInterest 15% 15%
Max Loan Max Loan £10,000£10,000Max Terms Max Terms 36 months36 monthsAprApr 12.5%12.5%
Max Loan Max Loan £15,000£15,000Max Terms Max Terms 48 months48 monthsAprApr 10%10%
Max Loan Max Loan £25,000£25,000Max Terms Max Terms 48 months48 monthsAprApr 8%8%
0
1
2
3
4
SCORINGSCORING
GENERICGENERIC
Bespoke scoringBespoke scoring
• Clients specific Clients specific scorecardscorecard
• Large sample (>2,500 Large sample (>2,500 goods, bads, goods, bads, indeterminates and indeterminates and declined accounts)declined accounts)
• 2 years history required2 years history required
• DelphiDelphi included as a included as a scorecard characteristicscorecard characteristic
Who for ....
BESPOKEBESPOKE
Generic scoringGeneric scoring
• New products
• Evolving markets
• Small portfolios
• Limited data for analysis
• Fast implementation
Who for....
SCORINGSCORING
GENERICGENERICBESPOKEBESPOKE
PUBLICINFORMATION
FILE
Combining elements of Combining elements of
Europe’s largest credit Europe’s largest credit
bureau to provide bureau to provide
one simple highly predictiveone simple highly predictive
DelphiDelphi SCORE SCORE
Europe’s largest consumer Europe’s largest consumer databasedatabase
Experian’s bureau data used Experian’s bureau data used in credit scoringin credit scoring
PUBLICPUBLICINFORMATIONINFORMATION
FILEFILE
Experian bureau dataExperian bureau data
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?
Does your applicant have any
CCJs? If so how recent and for how
much?
How is your applicant paying his CAIS accounts? Are they in arrears or in default? Does you applicant have lots of new CAIS accounts?
Key bureau questions
Has your applicant been applying for credit
recently? How often and for what type of credit?
Is your applicant confirmed
on the electoral
roll?
Does your applicant have any
CCJs? If so how recent and for how
much?
How is your applicant paying his CAIS accounts? Are they in arrears or in default? Does your applicant have lots of new CAIS accounts?
Key bureau questions
Has your applicant been applying for credit recently? How often and for what type of credit?
Is your applicant confirmed
on the electoral
roll?
Does your applicant have any
CCJs? If so how recent and for how
much?
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
Key bureau questions
… … introducing Mr Jonesintroducing Mr Jones
47 years old
Married Home owner
17 years at
current address
How bureau characteristics How bureau characteristics affect the score?affect the score?
Default Default score score 800800
• Most comprehensive address database in the Most comprehensive address database in the
UKUK
• 24 million addresses24 million addresses
• Validates postcode and addressValidates postcode and address
• Updated every 13 weeksUpdated every 13 weeks
Is the address traceable?Is the address traceable?
• Helps to confirm the names and addresses of UK resident Helps to confirm the names and addresses of UK resident voters voters
• Collated from 462 local authorities annuallyCollated from 462 local authorities annually
• October 10 is the “cut-off“ dateOctober 10 is the “cut-off“ date
• Are they on the voters roll at their Are they on the voters roll at their current or previous address?current or previous address?
Is your applicant living at the Is your applicant living at the address declared and for how address declared and for how long?long?
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
Default Default score score 800800
• 31 types of public information31 types of public information
• Information held for six years from date of entry Information held for six years from date of entry
• How recent are the CCJs and for how much?How recent are the CCJs and for how much?
• Risk indicatorRisk indicator
Are there any records of public Are there any records of public information for your applicant?information for your applicant?
PUBLICINFORMATION
FILE
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 - 200 pointspoints
Default Default score score 800800
Is there a fraud warning Is there a fraud warning attached to your applicant’s attached to your applicant’s address?address?
• The decision initially must be a The decision initially must be a REFERREFER
• Established in 1988 to share fraud experiencesEstablished in 1988 to share fraud experiences
• Warning attached to an address - fraudsters often Warning attached to an address - fraudsters often use different namesuse different names
• Obtain details from supplying memberObtain details from supplying member
• 9 categories of fraud eg. 9 categories of fraud eg.
- empty house = 1- empty house = 1
- impersonation = 2- impersonation = 2
• Experian host the informationExperian host the information
CIFAS The UK’s Fraud Prevention Service
• Launched in 1983 - promote responsible lendingLaunched in 1983 - promote responsible lending
• Information provided on the: borrower, lender, credit accountInformation provided on the: borrower, lender, credit account
• 4 types of accounts - 4 types of accounts - Active, Settled, Default and DelinquentActive, Settled, Default and Delinquent
• Characteristics looked at for exampleCharacteristics looked at for example
Active account arrears > 3 monthsActive account arrears > 3 months
High number of recently opened accountsHigh number of recently opened accounts
High outstanding balanceHigh outstanding balance
No active accounts in arrearsNo active accounts in arrears
• Updated monthlyUpdated monthly
How has your applicant been conducting their financial affairs?(Credit Account Information Sharing)
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 - 200 pointspoints
- - 150 150 pointspoints
Default Default score score 800800
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 - 200 pointspoints
- - 150 150 pointspoints
Default Default score score 800800
- 100 - 100 pointspoints
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 - 200 pointspoints
- - 150 150 pointspoints
+ 50 + 50 pointspoints
Default Default score score 800800
- 100 - 100 pointspoints
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 - 200 pointspoints
- - 150 150 pointspoints
+ 40 + 40 pointspoints
+ 50 + 50 pointspoints
Default Default score score 800800
- 100 - 100 pointspoints
Has your applicant had their Has your applicant had their house repossessed?house repossessed?
• Established in 1989Established in 1989
• Repossession registerRepossession register
• Closed user group Closed user group
• Provides application addressProvides application address
• May provide forwarding May provide forwarding addressaddress
• Records are retained for 6 Records are retained for 6 yearsyears
• Record of previous credit searches within the Record of previous credit searches within the last 12 monthslast 12 months
• Application information on:Application information on:
ApplicantApplicant
Application detailsApplication details
• Helps to identify over-omitted and fraudulentHelps to identify over-omitted and fraudulentapplicationsapplications
How credit active is your How credit active is your applicant?applicant? (Credit Application Previous Search)
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 - 200 pointspoints
- - 150 150 pointspoints
+ 40 + 40 pointspoints
+ 50 + 50 pointspoints
- 70 - 70 pointspoints
Default Default score score 800800
- 100 - 100 pointspoints
How bureau characteristics How bureau characteristics affect the score?affect the score?
+ 30 + 30 pointspoints
- 200 points
- - 150 150 pointspoints
+ 40 + 40 pointspoints
+ 50 + 50 pointspoints
- 70 - 70 pointspoints
Default Default score score 800800
- 100 - 100 pointspoints
Delphi score Delphi score = 400 = 400
• Identifying financial associations through:Identifying financial associations through:
- Joint applications for credit- Joint applications for credit
- Joint accounts- Joint accounts
• Is your applicant known by any Is your applicant known by any other name?other name?
- Maiden name- Maiden name
• Supplied by you the lenderSupplied by you the lender
Are there any financial associations Are there any financial associations or aliases for your applicant?or aliases for your applicant?
Guide to Credit Scoring 2000Guide to Credit Scoring 2000and the art of rejectionand the art of rejection
Notification and consentNotification and consent
• Lenders are encouraged to tell Lenders are encouraged to tell applicants that credit scoring may be applicants that credit scoring may be used as part of the decision making used as part of the decision making processprocess
• Lenders by law Lenders by law mustmust have have consent from a consumer consent from a consumer before carrying out a credit before carrying out a credit searchsearch
No consent
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...Consent - saying “yes” to...credit searchcredit search
storing datastoring data
sharing of informationsharing of information
prevention of fraudprevention of fraud
customer managementcustomer management
YES
The art of rejection - how to say The art of rejection - how to say “no”“no”
Written or verbal declinesWritten or verbal declines
• Tell them credit scoring has been usedTell them credit scoring has been used
• Provide a simple explanation of how it worksProvide a simple explanation of how it works
• Provide a principal reason for declineProvide a principal reason for decline
- - Without jeopardising the security Without jeopardising the security of your scorecard of your scorecard
oror
- Running the risk of fraud- Running the risk of fraud
1.1. How would you How would you explain to a customer explain to a customer what credit scoring is?what credit scoring is?
2.2. List reasons as to why List reasons as to why you may decline an you may decline an applicant.applicant.
Group exercise
Explanations of credit Explanations of credit scoring and how it works...scoring and how it works...
• Credit scoring measures the statistical Credit scoring measures the statistical probability that credit will be satisfactory probability that credit will be satisfactory repaidrepaid
• Credit scoring systems allocate points to Credit scoring systems allocate points to various pieces of information given on your various pieces of information given on your application form such as your age, whether application form such as your age, whether you own your home and to information you own your home and to information provided by a CRA. These points produce your provided by a CRA. These points produce your credit score and help to predict whether you credit score and help to predict whether you are an acceptable riskare an acceptable risk
Principal reasons for declinePrincipal reasons for decline A decline based on a low credit score A decline based on a low credit score
A decline based on information held at a credit A decline based on information held at a credit reference agency - tell them which one you used and reference agency - tell them which one you used and how to go about applying for a copy of their filehow to go about applying for a copy of their file
A decline based on specific company policiesA decline based on specific company policies
- Over commitment- Over commitment
- Home ownership (for a secured loan)- Home ownership (for a secured loan)
- Under age- Under age
- Not employed- Not employed
- Existing account performance- Existing account performance
Review of refusals and Review of refusals and complaintscomplaints• A rejected applicant must be informed A rejected applicant must be informed
of the proper procedures if appealing of the proper procedures if appealing
on a decision based on a credit scoreon a decision based on a credit score
• Credit grantors should reconsiderCredit grantors should reconsider
the application if relevant the application if relevant
additional information suppliedadditional information supplied
• A different lending officer A different lending officer
should review the applicationshould review the application
Review of refusals and Review of refusals and complaintscomplaints
• Designated officer in place for Designated officer in place for appeals - authority to override the appeals - authority to override the original decision original decision
• Credit grantors should keep their Credit grantors should keep their appeals procedures under continual appeals procedures under continual reviewreview
• Credit grantors should establishCredit grantors should establish complaints procedures and inform complaints procedures and inform customers about them if they wish customers about them if they wish to complainto complain
SummarySummary
• Credit scoring is the fastest and fairest way of Credit scoring is the fastest and fairest way of making a decisionmaking a decision
• A low score is not always adverse CRA dataA low score is not always adverse CRA data
• Don’t be secretive, be open and honestDon’t be secretive, be open and honest
• Take responsibility for the decisionTake responsibility for the decision
Why use monitoring?Why use monitoring?
Monitor/Evaluate
Tune/Build Scorecards and
Strategies
Implement
Integrated solutionsIntegrated solutions
• Ensure scorecard Ensure scorecard performs optimallyperforms optimally
Why use monitoring?Why use monitoring?
Dynamic delinquencyDynamic delinquency
ApplicationDate
Q3 2000 0.5% 1.1% 2.0% 3.6%
3 months 6 months 9 months 12 months
Age of account
Q4 2000 0.5% 1.2% 2.2% 3.7%Q1 2001 0.6% 1.3% 2.1% 3.5%
Q3 2001 1.4% 2.3%
Q2 2001 0.5% 1.2% 2.0%
Q4 2001 1.3%
Dynamic delinquencyDynamic delinquency
ApplicationDate
Q3 2000 0.5% 1.1% 2.0% 3.6%
3 months 6 months 9 months 12 months
Age of account
Q4 2000 0.5% 1.2% 2.2% 3.7%Q1 2001 0.6% 1.3% 2.1% 3.5%
Q3 2001 1.4% 2.3%
Q2 2000 0.5% 1.2% 2.0%
Q4 2001 1.3% New communication strategy
Misalignment reportMisalignment report
Score Total
to 850 2:1
851-900 4:1
901-950 7:1
951-1000 13:1
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 21:1
Other
2:1
4:1
7:1
12:1
20:1
Residential Status
Misalignment reportMisalignment report
Score Total
to 850 2:1
851-900 4:1
901-950 7:1
951-1000 13:1
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 21:1
Other
2:1
4:1
7:1
12:1
20:1
Residential Status
• Ensure scorecard performs optimally
• Identify changes in applicant profile
Why use monitoring?Why use monitoring?
Applicant population Applicant population stabilitystability
Married 54 48
Single 32 41
Widowed 3 3
Divorced 9 7
Separated 2 1
% of Applicants
Marital status Development Current
Applicant population Applicant population stabilitystability
Married 54 48
Single 32 41
Widowed 3 3
Divorced 9 7
Separated 2 1
-11%
+27%
% of Applicants
Marital status Development Current
• Ensure scorecard performs
optimally
• Identify changes in applicant
profile
• Identify sources of good/bad
business
Why use monitoring?Why use monitoring?
Source of businessSource of business
Application Date
% FromDirect Mail
% From Media Advertising
00 Q2 37 6300 Q3 39 6100 Q4 38 6201 Q1 39 61
New Communications Strategy
01 Q2 29 7101 Q3 30 7001 Q4 31 69
Source of businessSource of business
Application Date
% FromDirect Mail
% From Media Advertising
00 Q2 37 6300 Q3 39 6100 Q4 38 6201 Q1 39 61
New Communications Strategy
01 Q2 29 7101 Q3 30 7001 Q4 31 69
(Ave score = 950)(Ave score = 950) (Ave score = 910)(Ave score = 910)
• Ensure scorecard performs optimally
• Identify changes in applicant profile
• Identify sources of good/bad business
• Referral analysis
Why use monitoring?Why use monitoring?
Referral analysisReferral analysis# Accepts # Rejects Reject rate
Not referred 14,000 6,000 30%
ReferralsAge <21 1,000 1,000 50%
Unemployed 500 500 50%
Address notconfirmed
500 1,500 75%
Total 16,000 9,000