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Devil's Advocate

Roger Elwell - Yes Please

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Does Credit Scoring Really Serve Us Well Anymore?

07 November 2008  |  3806 views  |  1

One of the processes that needs to be examined, as the world's authorities work out how to change the financial infrastructure for the better, is the process of automated and remote credit scoring and the role it plays in the overall credit decision.  I think there's a case for either restricting its use to certain loan types, or at the least reducing the importance it has on the final decision.

I remember when credit scoring was adopted in the UK (in the early 1980's, I recall).  I was working in a bank at the time and I remember the early days, when we had to fill in a form and use a scoring card to calculate the result manually.  That result was only part of the decision, which included a separate proper assessment of peoples' income and outgoings, properly evidenced by the applicant.  Furthermore, in those days the applicant actually had to attend an interview, where the bank manager, or clerk, got to interrogate the person as to the reasons for the loan, how they were going to repay, etc.  These days, it is hightly unlikely that such a level of scrutiny is employed, and credit scoring alone is relied on - certainly, applying for a credit card, car loan etc. is a remote business these days (and, in some cases, so is applying for a mortgage).

Purists would say that the credit score is the best predictor of creditworthiness and it is therefore right that this is the primary tool, as it removes the objectivity that would inevitably creep in if a bank manager were making the decision.  Cynics like me would ask; if that's the case, why are we in the mess we're now in?

One undesirable by-product of remote decisioning is a general reduction in understanding of financial affairs.  The general public only hear a 'yes' or 'no' these days.  They don't get taken through a detailed assessment of their income and outgoings, like they used to, so how can we expect them to build an understanding of how to assess themselves as to whether they can really afford the loan/mortgage/credit they are applying for?  In the old days, the best way to decline an application was to show a customer how they couldn't afford to repay the loan they wanted and to actually hear them offer the opinion that they couldn't.  That meant two things:  1) they didn't resent the bank for declining and 2) they had improved their own understanding of affordability and financial management as a whole.  None of this happens these days...

I believe that we should look closely at changing the way credit decisions are taken, and require applicants to meet a real-life person, produce hard evidence of income and outgoings, and have a proper dialogue with the bank before a loan is sanctioned.  Yes, this will reduce the efficiency (and therefore increase the costs) of the application process, and may even ration credit still more (partly because of practical restrictions on the capacity of banks to conduct interviews).  If, however, the result is a) better overall credit decisions and b) an improvement in people's understanding of finance, that would surely be better for us in the long run...

TagsRisk & regulationRetail banking

Comments: (1)

A Finextra member
A Finextra member | 10 November, 2008, 08:29

Though there will be always possibility of bias in human assessment but the insight offered by discussion with potential borrowers is inavaluable. Be it either small loan or a big loan, interview with borrower uncovers lot of facts which can not be uearthed by credit scoring. Credit scoring alone is definitely not a good decision maker but making it a part of wider assessment procedure definitely yields a better credit decision. Human factor must come back to credit. It might sound expensive to some but it is least expensive way in the long run. It can save a lot of costs which we can not measure today and will be definitely cheaper in long run and will  benefit to society as well.

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job title Consultant
location Colchester
member since 2008
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Consulting to the financial services industry with a specific expertise in the cards business - issuing and acquiring.

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