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New Risk Score From Equifax-FICO Alliance Identifies Which UK Consumers Can Handle More Credit

Stocks in this article: EFXFICO

LONDON, Sept. 27, 2012 /PRNewswire/ -- Global information solutions leader Equifax and FICO, the innovative provider of analytics and decision management technology, today announced the release for the UK market of the FICO ® Credit Capacity Index™, built on Equifax's market-leading risk score, Risk Navigator 4 (RN 4). Research indicates that UK card issuers could safely extend more credit to 15 percent more consumers on average.

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Capitalizing on FICO's patented analytic technology and Equifax's rich credit data and bureau characteristics on the UK population, the new solution from the Equifax-FICO alliance gives lenders a more effective way to assess a consumer's ability to manage additional credit. Issuers will be able to take a more forward-looking view of credit risk, enabling them to grow their customer portfolios without extending credit increases to consumers who will be unable to manage the additional debt.

Initial analysis shows that a sizeable number of UK borrowers could handle additional credit. FICO and Equifax forecast the effects of extending more credit using the FICO Credit Capacity Index with RN 4 and found that the largest UK credit card issuers could safely lend to 15 percent more consumers on average, while maintaining current risk levels.

"We have tested the FICO Credit Capacity Index based on Equifax data, and we are impressed by the results," said Rick Odd, head of risk for Current Accounts and Credit Cards at HSBC. "This is precisely the kind of innovation the UK banking industry needs to pursue profitable growth and continue to further enhance their commitment to responsible lending. We are investigating how we could utilise this new metric in our lending strategies."

Adding profit per account

Validation on a nationwide sample of UK accounts showed that using the FICO ® Credit Capacity Index™ with Equifax's credit risk scores to set initial credit lines would add about £2.50 of profit per account booked. A separate validation showed that a UK issuer using the Credit Capacity Index with Equifax RN 4 for a credit line increase strategy could improve profit by more than £2 per account on that one line increase.

Using Equifax RN 4 with Credit Capacity Index can help to identify apparently low-risk consumers who are more likely to experience difficulty managing additional credit. Similarly, the combination of the two scores can help lenders find consumers in higher-risk score ranges who have higher capacity and are likely to be responsible users of new credit, thereby creating growth opportunities.

Analysis shows that among low-risk consumers with the highest RN 4 scores, those with the lowest Credit Capacity Indexes were 13 times more likely to default on a new loan than consumers with a high Credit Capacity Index.

"Lenders understand their responsibility to determine consumer indebtedness and affordability as well as meet the requirements for treating customers fairly," said Shawn Holtzclaw, managing director, Equifax UK. "But this must be balanced with the clear need for new credit to be extended in the UK market to facilitate growth. This innovative solution from Equifax and FICO combines the expertise of each organization to deliver a solution that is not possible from any single provider. By giving lenders a better understanding of each consumer's credit capacity, this product can play a vital role in freeing up capital to stimulate the UK credit market and economy."

Advanced analytics

FICO developed the Credit Capacity Index using a patented analytic technology known as Future Action Impact Modeling, which predicts the effect future actions would have on a consumer's credit risk. FICO has already launched the Credit Capacity Index in the US and other markets.

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