The Consumer Indebtedness Index has been developed as an aid to responsible lending and is being used by Nationwide to further improve the quality of its credit granting decisions. It is designed to help identify individuals who may currently be able to fulfill their current repayment obligations but whose overall level of indebtedness means that they would struggle to keep up with their payments if they were to increase their commitments.
According to Experian, whilst the great majority of consumers in the UK are adequately managing their credit commitments, a small minority, 6.9 per cent of the UK’s 'credit active' population is on the brink of financial difficulty because they have already borrowed as much or more than they can afford. The CII has been designed to identity those very individuals who are currently up-to-date with their payments but are struggling to manage their debts and likely to be in difficulties in the future if they take on more debt.
Roger Williams, Head of Retail Credit Risk, Nationwide Building Society, said: “We are committed to responsible lending and welcome new initiatives, such as the CII, as a means to reduce the risk of consumers becoming overindebted. With Experian, we are taking a major step forward and have found the CII to be highly predictive. Because the CII is able to provide a specific measure of indebtedness, it is helping us to more accurately assess applications for credit and consumers' potential ability to repay new and existing commitments.”
Tim Morris, Director and General Sales Manager in Experian’s Consumer business, said: “We are very heartened at the number of lenders, including Nationwide, who are already using or plan to use the Consumer Indebtedness Index in the near future.”
“Consumer indebtedness has become a highly visible issue since the Task Force on Overindebtedness issued its last report in 2003 and a number of high profile cases of individuals with severe difficulties have raised the profile of this important issue.
“In reality, our analysis of consumer debt levels – based on their credit agreements with almost every UK lender – show that most people are managing their credit commitments adequately. However, in the past, tools designed to assist underwriters have not shown how many of those people who appear to be coping at the moment are actually experiencing, or are likely to experience, real financial difficulties. The Consumer Indebtedness Index is able to help do this.
“It is as important for lenders to be able to identify those people who are in danger of over-committing themselves, as it is for them to be aware of those who are already in financial difficulties or have a record of poor payment and, therefore, pose a high risk of defaulting. The Consumer Indebtedness Index has been designed to support responsible lending by helping lenders to avoid granting further credit to consumers who are already heavily in debt and may be pushed beyond their ability to pay.
The Consumer Indebtedness Index was launched in 2003 and to meet the calls from clients, consumer groups and government, in particular the Task Force on Overindebtedness, for creditors to do more on responsible lending. At the same time, other initiatives, by the advice industry and the FSA, particularly in the area of consumer support and education, will help consumers themselves to better assess their own position too.
Tim Morris, concludes: “The Consumer Indebtedness Index is third party data compliant and, as lenders stop using household details to decide individual applications, they will be able to use the Consumer Indebtedness Index, which has proved to be even more accurate at predicting who can and cannot afford to borrow more.”
