Credit Scorecard of the United Kingdom

Credit scorecards are mathematical models which attempt to provide a quantitative estimate of the probability that a customer will display a defined behavior such as loan default, bankruptcy or a lower level of delinquency with respect to their current or proposed credit position with a lender. Scorecards are built and optimized to evaluate the credit file of a homogeneous population. Example of these are files with delinquencies, files that are very young, files that have very little information. Most empirically derived credit scoring systems have between 10 and 20 variables.Application scores tend to be dominated by credit bureau data which typically amounts to over 80% of the predictive power from closer to 60% in the late 1980s for UK scorecards. Indeed there has been an increasing trend to minimize applicant or non-verifiable variables from scorecards which has increased the contribution of the credit bureau data.

Credit scoring typically uses observations or data from clients who defaulted on their loans plus observations on a large number of clients who have not defaulted. Statistically, estimation techniques such as logistic regression or profit are used to create estimates of the probability of default for observations based on this historical data. This model can be used to predict probability of default for new clients using the same observation characteristics such as age, income, house owner. The default probabilities are then scaled to a “credit score.” This score ranks clients by riskiness without explicitly identifying their probability of default. There are a number of credit scoring techniques such as: hazard rate modeling, reduced form credit models, weight of evidence models, linear or logistic regression. The primary differences involve the assumptions required about the explanatory variables and the ability to model continuous versus binary outcomes. Some of these techniques are superior to others in directly estimating the probability of default. Despite much research from academics and industry, no single technique has been proven superior for predicting default in all circumstances. Credit scoring is closely regulated in the UK, with the industry regulator being the Information Commissioner’s Office. Consumers can also send complaints to the Financial Ombudsman Service if they experience problems with any Credit Reference Agency. It is very difficult for a consumer to know in advance whether they have a high enough credit score to be accepted for credit with a given lender. This situation is due to the complexity and structure of credit scoring, which differs from one lender to another.

One of the softwares being used in tracking the credit scorecards

One of the softwares being used in tracking the credit scorecards

Image by statsoft

Credit Scores for Sweden and South Africa

South Africa

Credit scoring is used throughout the credit industry in South Africa, with the likes of banks, micro-lenders, clothing retailers, furniture retailers, specialised lenders and insurers all using credit scores. Currently all four retail credit bureau offer credit bureau scores. The data stored by the credit bureaus include both positive and negative data, increasing the predictive power of the individual scores. TransUnion offer the Empirica Score which is, as of mid-2010, in its 4th generation. The Empirica score is segmented into two suites: the account origination and account management. Experian South Africa likewise have a Delphi credit score with their fourth generation about to be released in late 2010. Compuscan released CompuScore ABC in 2011. The scoring suite predicts the probability of customer default throughout the credit lifecycle.

Sweden

Sweden also has a system for credit scoring that aims to find people with bad payment histories. It has only two levels, good and bad. Anyone who does not make debt payments on time, and continues not to make payments after they are reminded, will have their case forwarded to the Swedish Enforcement Administration which is a national authority for debt collection. The mere appearance of a company as a debtor to this authority will result in a record among private credit bureaus; however, this does not apply to a private person. This record is called Betalningsanmärkning and by law can be stored for three years for a private person and five years for a company. This kind of nonpayment record will make it very difficult to get a loan, a rental apartment, a telephone subscription, or a job with cash handling. The banks, of course, use income and asset figures in connection with loan assessments. If one gets an injunction to pay by the Enforcement Administration, it is possible to dispute it. Then the party requesting the payment must show its correctness in district court. Failure to dispute is seen as admitting the debt. If the debtor loses the court trial, costs for the trial are added to the debt. Taxes and authority fees must always be paid on demand unless payment has already been made.

Credit Score Report

Credit Score Report

Image by toplinecu

Europe Prepares for An Increase in Credit Card Defaults

There has been a considerable amount of increase in consumer debt defaults as the credit card crisis caused billions of dollars in losses among US banks that spans across the Atlantic.

The International Monetary Fund projects that of US consumer debt totalling $1,914bn, about 14 percent of that will be defaults in payments.

Much of that falling will come from UK, the continent’s biggest nation of credit card borrowers. According to a data released by the National Debtline of the UK, there has been a considerable increase in the number of calls it has received from UK consumers, all faced with the dilemma of loans, credit cards and mortgage arrears. It has doubled from the twenty thousand calls it had recorded from May, 2008. Calls received since May of this year hit 41,000. It further added that the number of calls showed no signs receding.

Create and follow a budget Image taken from: Funds for NGOs

Create and follow a budget
Image taken from: Funds for NGOs

In the UK, the latest credit card indices from Moody’s, the rating agency, the yearly charge-off rates had increased tremendously from 6.4 per cent of loans in May 2008 to 9.37 per cent in May 2009.

Analysts further added that they expect more defaults as unemployment in the UK rises and personal insolvencies, which reached 29,774 in the first quarter of the year, and continues to increase.

Add to these is the falling UK housing market, and stricter lending requirements by banks which means that consumers suffering from defaults in their payments cannot withdraw equity from their homes to pay off debts such as credit cards or unsecured loans.

UK banks have also reported an increase in credit card debts.

Credit card delinquencies had increased in the first quarter of the year, which reflects a negative image in economic conditions and the rising unemployment.

The result of which is a reduction in credits and tightening approval rates for new credit cards which was, as of March this year, running less than fifty per cent.

The graveness of the problem in the financial crisis alongside the rising unemployment on both sides of the Atlantic have created a scenario of fear of a substantially higher default rate in the coming months.

The Euro Crisis

The Eurozone crisis is an on going crisis that has been affecting the countries of the Eurozone since 2009. This crisis happened when a group of ten central and eastern European banks asked for a bailout. What is a bailout and what prompted these banks to ask for a bailout?

 

A bailout is an act of giving financial assistance to a failing business or economy to save it from collapse. At that time in 2009, the European Commission released a forecast of a 1.8 per cent decline in EU economic output . What were the reasons for giving such a forecast? First, weak and actual potential growth. Secondly, the competitive weakness. Third, liquidation of banks and sovereigns. Fourth, large debt-to-GDP ratios, and lastly, considerable liability stocks (government, private and non-private sector).

Clear off your debts. Image taken from: The Monroe Institute

Clear off your debts.
Image taken from: The Monroe Institute

There has been a considerable increase in the number of people in the UK who are seeking financial assistance from many help groups. Why are they seeking help? Financial analysts say some consumers run into problems of making their payments and are thus forced to declare bankruptcy. This may cause serious implications in the future for this borrower when he tries to apply for anything be it a car loan to a job with a large corporation. A lot of big corporations nowadays require pulling up credit records as part of the job screening process.

 

For others, however, becoming insolvent is their only choice. In a recent report put out by The Bank of England, it showed that there are different forms of insolvency and the remedy for each individual is slightly different from the other. They are as follows:

 

-Bankruptcy

-Individual Voluntary Arrangement (IVA)

-Debt Relief Orders

 

For the particular case of each individual person, one option may be better than the other.

 

The most commonly form of financial insolvency is bankruptcy, and many individuals use this status. The benefit if using this status is that the person concerned is wiped clean, but in the process one loses every asset of value.

 

Next is the Individual Voluntary Arrangement wherein the person and his/her creditors seek the help of a professional to arbitrate and make a promise to pay.

 

Last form of financial insolvency is the debt of relief orders which is a newly introduced method for certain people to pursue.