This is a very pertinent question to ask in today’s data driven economy.The fact that Sally was late in paying her bills once or twice and ended up on the wrong side of the credit reporting agencies should not be used as a continued marker of her financial performance. Circumstances change. People change. However, an isolated event that may have been a result of an isolated incident in Sally’s life labels her as a financial delinquent for the next 5 or 7 years – HOW IS THAT FAIR?
The time had come to build and deliver to the market a better way to assess credit risk associated with an upcoming financial transaction with our friend Sally. A method that would take into consideration the current situation more than the past events. In doing so, we came up with the following three key parameters we wanted to incorporated into our thinking.
When credit risk events happen in someone’s life, it can have one of three possible outcomes.
It changes your perspective on how to manage financial risk (in a good way).
It can lead to a position of self-doubt and self-sabotage to the point where you start to believe that you will never get ahead in life and that you’re financially hopeless for all intents and purposes.
Or the third outcome is that you just carry on, business as usual and remain completely unaffected by the impediment to your credit ability.
In each case, the outcomes are dangerous for the greater good of an economically savvy and financially prudent society.
Our view is that the entire Credit Reporting model is BROKEN. It has a place in modelling financial risk… but the amount of emphasis laid on credit score is highly over-rated in our opinion.
Lets take an example. Property Managers tasked with the responsibility of renting a property are often blamed for prejudice against prospective tenants. We understand why.
Part of the due diligence a Property Manager is required to conduct is to assess the financial ability of the tenant relative to the rental obligation for the said property.
So…enter credit check. Sure. It tells you how Sally did last year or the year before or the year before that. How many times she failed to pay her bill… but what if Sally has changed her ways? What if, Sally is now better off and she has had no credit events over the last 3 years?
Well now you need to check her bank statements to see if she is making enough money to be able to afford this property. But wait… you’re a property manager not a loan officer and Sally isn’t asking you for a loan? Why does she need to give you her bank statements? Just so you can see how many times she is feeding her kids take-away meals and cast your prejudice upon her?
Data must be analysed without prejudice to anyone’s financial habits.
Instead of trying to “predict” how an individuals’ financial performance will turn out to be (over time), our view is to analyse the facts as they stand today and assess them in relation to a benchmark or a set of parameterts that matter today.
For instance, you need to know if Sally can afford to pay $750/week in rent for the next 52 weeks. A credit report will do nothing in terms of answering that question for you.
A bunch of payslips – yes, as long as they aren’t forged.
Bank statements – sure, as long as they are genuine and you can keep away from prejudice toward the tenant.
But what if there was a way (driven by mathematics) to assign a probability score, based on Sally’s income, expenses, ratio of surplus/deficits at the end of each month, compared with the proposed outgoing obligation, matched against existing bills and obligations – all expressed in a single score or even better, an answer like “Yes”,”No”, “Probably” or “Doubtful”.
And thus FinScore™ was born. A single, simple, numeric score that is designed to express the statistical probability of a person’s financial position relative to a benchmark question.