New model predicts when borrowing goes bad

Credit card and mortgage interest rates are set to become tailored to our exact credit history and behaviour, thanks to a new model developed by academics.

The ‘intensity model’, developed at the University of Edinburgh Business School, allows banks to more accurately predict when and where their customers are most likely to fall behind on payments.

It will also help banks protect themselves from the £13.2 billion lost to defaults each year.

Global conference

The model has been developed by Professor Jonathan Crook at the University of Edinburgh Business School.

He will present it at the Credit Scoring and Credit Control conference, a global gathering of credit experts, held at the Business School on 26-28 August.

The ability to accurately predict consumer delinquency, default and catch up payments over any given period in the life of a loan, and even stress-test these against different economic conditions, is a hugely powerful tool that will benefit consumers and lenders, and help to ensure our banking system is better protected in the future – which is good for the economy as a whole.

Benefits for consumers and banks

Banks using the new system will be able to more accurately predict which borrowers will miss loan repayments and when, enabling them to offer tailored interest rates based on past borrowing behaviour and credit risk.

Borrowers with poor credit scores and histories will pay higher interest while those with a good credit profile will increasingly benefit from lower interest rates as lending institutions begin to compete more vigorously on lending rates.

The work of Professor Crook and his colleagues at the Credit Research Centre is leading the way in the development of credit risk models. If employed across the financial sector this new model could play a significant role in helping banks and regulators take steps to avoid the build-up of excessive consumer debt, leading to difficulties for individuals and institutions alike.