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Credit economics - getting closer to individual borrowers

Current research has established a useful role for macroeconomic variables in credit scoring methodologies. A key limitation of standard approaches, however, is that they assume that all account holders are subject to identical ‘economic conditions’ as indicated by aggregate measures such as interest rates, unemployment and disposable income.  

By combining core competencies of powerful data assets with predictive analytics, Experian sets out a unique approach to making credit decisioning tools ‘forward looking’. This approach enhances the ability of portfolio owners, risk managers and regulators to:

  • Quantify credit risk under current and future economic conditions at the level of individual borrowers.
  • Estimate and predict segment and portfolio level default rates adjusted for current and future economic conditions, which supports segment and portfolio loss forecasting.
  • Stress these estimates under different macroeconomic scenarios in a coherent and transparent way.
  • Undertake industry level benchmarking in the light of current and future economic conditions

Household and customer economics

Experian’s Household Mosaic Economics links Experian’s UK economic outlook and local area forecasts with our geo-demographic household segmentation systems, providing forecasts of how individual households will be impacted by the current economic outlook or future scenarios in terms of: income, unemployment, spending, assets and the key drivers of default.

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Stress testing

Our comprehensive macroeconomic forecasting capability allows us to undertake client-specified scenario exercises at a national, regional and segmented household level/ Scenario analysis can be carried out by Experian, using our own suit of models; or by clients, using desktop scenario tools built and licensed by us.

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Credit scores: Future Delphi

There is ample evidence that economic conditions influence debt behaviour. Experian’s approach to incorporating economics into credit analysis acknowledges and exploits the variation in economic conditions facing different groups of borrowers (identified on the basis of residential location and household type), so greatly expanding the information available.

Experian offers a set of new bureau scores (Future Delphi) based on the existing Delphi scores, which incorporate household economic data at national, regional and local level.

These new scores are able to track the changes in bad rate over time, which make our scores more resilient to economic change – future proof.

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