Boffins devise new credit scoring system

University of Edinburgh scientists have devised a new credit rating system which they claim would be more helpful than the current system in preventing people falling into debt.

Their new approach doesn’t just concentrate on the individual applicant’s credit history, but also incorporates the general state of the economy into the modelling. By including consumer confidence, earnings and other economic factors such as interest rates they believe their system offers a more accurate risk assessment picture for lenders.

Most of the UK banks and building societies use a system of credit scoring that concentrates on applicant’s debt payment history, how long they have been employed and what type of work they do, and how many times the individual has moved home. But, now the University of Edinburgh boffins are hoping that some of the UK’s leading financial institutions and those companies that provide credit cards will now test the system.

Professor Jonathan Crook of Edinburgh University’s Credit Research Centre is confident that their tests will be more accurate in predicting debt defaults than current rating systems. He points out that increased earnings and a higher FTSE index all point to an improving economy and therefore reduced risk of default for lenders. However, higher interest rates, rising house prices and greater unemployment all affect peoples’ spending power which results in a higher risk. That discrepancy is not covered in existing modelling. “We have found that our model allows for better predictions that some people will default,” said Crook.

Details of the new credit rating modelling system have emerged in the same week that Moneyexpert.com has revealed that an estimated 3.27 million people had their applications for credit cards rejected in the period from April to September 2007. Prior to the credit crunch one in three applications were refused, now financial institutions are turning down 50% of applicants, causing problems for many ‘switchers’ who survive by transferring their debt to other short-term credit card deals. Indeed, many experts are predicting that consumers will be shocked at the restrictions imposed on borrowing by banks desperate to avoid further losses by improving the quality of their lending. They also predict that those heavily in debt will find it nigh on impossible to get further borrowings, putting them straight into financial meltdown.

But, the scientists who devised the University of Edinburgh model claim it is more accurate than current rating systems. They say its adoption by the UK’s financial institutions would see many less people in the sort of debt misery that millions now face.