For more than half, meanwhile, the first sign that a borrower is struggling to meet their commitments would be a missed repayment.

It could be an alarming finding, considering the cost of living crisis and the thirteen interest rate hikes put forward by the Reserve Bank of Australia (RBA) since mid-2022. 

“It’s never been more important for lenders to be able to proactively identify when a customer’s financial situation has changed,” director of client advisory for credit services at Experian Charlotte Rankin said.

More than 90% of risk leaders are anticipating an increase in credit stress, missed repayments, and delinquencies in 2024, according to 75 surveyed by Experian for its annual Risk Radar Report.

The company, which consumers might recognise for its credit reporting service, has combined its findings with research commissioned from Forrester to make observations on the current lending climate.

“With two in three risk leaders saying that limited resources and expertise are holding back their risk management systems from being the best they can be, it’s clear that more investment in technology is needed if businesses want to successfully navigate through today’s economic climate,” Ms Rankin said.

But it's not just lenders that don’t have important know-how when it comes to assessing creditworthiness.

The majority of Australians – 65% – don’t know what their credit score is, according to debt consolidation service provider Salt&Lime.

That’s despite nearly eight in ten Australians having at least one financial product. 

If you’ve signed onto a credit product in the past, you likely have a credit score and history - even if you have had a phone, internet, or electricity bill in your name.

It’s a scale, typically ranging from zero to 1,200, used to assess how ‘trustworthy’ you appear to banks and lenders, with those with higher scores often offered products with better interest rates or fewer fees.

Late or missed repayments and applying for multiple products in a short time frame will lower your credit score, while consistently meeting your commitments will increase it.

Of more than 1,000 home loan borrowers surveyed for the InfoChoice Real Hardship Report, 10% were late on at least one mortgage repayment.

“A person’s credit score will determine whether they can secure loans under reasonable conditions,” Salt&Lime CEO and co-founder Will Klin said.

“Unfortunately, this sort of thing is not taught in schools and a lack of knowledge can push people into loans with punishing interest rates, high fees, and restrictive conditions.”

While a person’s credit score is a key consideration for many lenders when assessing applications for loan products, it's not the only thing they take into account.

Many comb through transaction data, determining whether a would-be borrower’s spending habits would inhibit their ability to meet repayments. 

However, according to Experian, only 16% of risk leaders say the data they have is sophisticated enough to actually identify red flags among customers’ transactions.

Is AI the future of loan approvals?

The majority of risk leaders surveyed said they need more resources and investment to better assess risks.

More than three quarters also said they’re actively exploring the use of AI and other data sources in order to get a greater understanding of the financial situations of current and future customers.

"While AI is driving innovation and enhancing analytical performance, it is critical to ensure this technology is used in a responsible and ethical way,” Ms Rankin said.

Unintentional bias in AI has raised eyebrows in the past, and there’s a chance the technology could fail to objectively assess individuals' applications.

According to Deloitte, subconscious biases input into AI could create an ongoing cycle or the technology could acquire new, discriminatory behaviours.

Despite such concerns, AI is already being used by many lenders, including some of Australia’s major banks. 

Westpac led a funding round supporting AI-powered lending decision platform Rich Data Co late last year. 

The big four bank announced plans to introduce the technology to its business lending decision-making process in January 2023.

Rich Data Co analyses borrowers’ transaction data, finding patterns and insights and using those to make predictions on a person's future outflows. 

CommBank, meanwhile, uses the technology to help identify financial abuse and predict billing cycles, among other things.

Image by shurkin_son via freepik

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