Dear Gini,

Historically, we have managed our customers based upon the information we maintained on their performance with us. Recently, we added credit monitoring tools to bring in external information. Using the most current credit score has been around for a long time, but now there are more triggers available that are based on factors beyond score.  Do you have any experience with these types of triggers?

Mr. Strategy

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Dear Mr. Strategy,

Kudos to you for seeking knowledge to improve your strategies! These kinds of “triggers” have been used in an attempt to add some additional information to the decision mix. The first one, score trends, asked whether the bureau score was trending up or down?  The idea is that you could draw some conclusion from the trend and adjust your strategies.

This was a blunt tool at best and the score development companies would argue that all of the information in the bureau files was used in the development of the score, and if there was some additional value in the trend it would be part of the current score.

The same could be said for monitoring tools, where creditors can set criteria (e.g. increased delinquency levels) and get a warning if a certain boundary was exceeded. Here too the issue is whether this does improve upon the score and how would these factors be used.  Most companies take immediate adverse action when a trigger is tripped and there have been few true empirical studies on the marginal value of using these tools.

We have not seen studies on what reduction in losses is obtained and at what cost with these techniques. It should make an interesting experiment to design a strategy (one with and one without) to test what the marginal improvement actually is.

One key item to ponder is overall debt load. You may begin to see a customer utilizing more and more of their available credit lines, that could be an important element that was not available to the model development team and have an impact on your strategies. The question is – is this an item you can have the bureaus watch and “trigger” when a specific parameter is reached? The next question is what do you do when your trigger level is reached? We have seen many creditors react in a knee jerk fashion and close a credit line down or some other serious adverse action based upon just one data element.

As mentioned earlier, without some empirical data on the added or marginal value of using the “new” information, there is no way of determining the impact of the changes you are making.  The argument for using this data is that it is the “most important” factor or most recent indicator of what the risk is and you can not ignore it. On the other hand, without knowing what the actual debt ratio changes are (including the income component) you do not really know if your customer has passed a threshold that should cause you concern.

If you understand the potential pitfalls in using this kind of data to modify your strategies you can also set up some additional tracking to find out if you are adding value or just losing revenue.  You are on the right track already by digging deeper into understanding these triggers to improve your strategy.  Now get to work and put your knowledge to the test!

Good luck,
Gini

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