Predictive models of expenditure and over-indebtedness for assessing the affordability of new consumer credit applications

Lenders are under increasing pressure to consider measures of affordability and indebtedness as well as risk, when assessing consumer credit applications. In order to evaluate the affordability of a new credit product, a lender needs information about the applicant's income and outgoings. However, while most lenders obtain information about income and credit commitments many do not have much, if any, pertaining to other expenditure. Therefore, they are not well positioned to determine an individual's ability to fund new borrowing. This paper demonstrates that using only data captured on a typical application form, combined with data from a credit bureau, it is possible to develop good predictive models of expenditure and over-indebtedness that can be used in conjunction with measures of risk to reject applications from individuals who are likely to already be over-indebted, or to restrict the volume of credit advanced to that which the applicant can afford.