Credit scoring is an essential assessment tool in identifying creditworthiness of a client prior to obtaining approval from the lender. It raises a red flag if the assessment reveals potential credit default risks such as a bad debt history. However, potential risks are not exclusive to previous financial transactions or loan history, but rather personality characteristics and behaviour as well. In fact, frequently personality predicts financial behaviour and consequent credit rating.Enquire Now
As a holistic approach in assessing creditworthiness, behavioural credit scoring uses psychometrics to develop a behavioural and personality profile of applicants. When combined with traditional scoring tools, it creates a more accurate scoring method of credit rating based on comprehensive data points to identify credit default risk. This identifies the most suitable applicants who have a greater likelihood of meeting their repayment obligations. Consequently, the business is more informed when making lending decisions and is better able to identify, and avoid, high risk loans, leading to greater financial return and security for lenders. Furthermore, the inclusion of such additional information available to lenders, allows for consideration of a wider range of potentially suitable applicants such as those that may not have an established credit history.
In the same manner as mental stability is assessed for emergency services personnel, and clinical assessments are developed to diagnose mental illness; personal attributes, experiences and personality can be assessed to assist prediction of the preparedness to fulfil financial obligations. This is the essence of behavioural credit scoring. Research has demonstrated that biodata, personality characteristics and behaviours reasonably predict a person’s probability of engaging in risky financial decision making, supporting the application of this information within creditworthiness tests. In addition to traditional methods, some areas addressed by behavioural credit scoring include attitude toward risk taking, conscientiousness, emotional stability and work adjustment difficulties.
Incorporating a range of responses, a risk index can be compiled to indicate an applicant’s likely financial behaviour. While there is a strong evidence basis for the use of psychometrics, including personality and biodata characteristics, such behavioural credit scoring is designed to be used as a cumulative profile and not as the sole determinant in the decision-making process. It is used most effectively as an additional dimension in managing financial risk.