Introduction
When evaluating someone's creditworthiness it's crucial to have tools that provide insights into their financial habits, as we’ve seen with the trend summaries and spending breakdowns in other articles in this collection e.g. Spending over time.
However it is also important to look out for signs of financial stress or indications of affordability risk that rely on a combination of data points. For example account balance over time vs revolving credit utilisation or whether the applicant’s surplus income is sufficient to afford the proposed repayment.
Introducing affordability “Alerts”
Within the Spending tab lies a vital sub-tab named "Alerts." This tab gives you a snapshot of whether the proposed repayment is broadly affordable and whether there are any obvious affordability risks; by combining the information available from the applicant's credit file with the information from their open banking connection(s).
The Alerts sub-tab has a traffic light system:
Green - everything appears OK
Amber - there may be some issues with affordability
Red - it is likely that there are issues with the applicant’s affordability
The Alerts sub-tab contains two alerts:
Indicative disposable income alert - helps answer the question of whether applicant has enough discretionary income (calculated from open banking) to afford their current repayments (taken from CRA data), proposed repayment (entered by the applicant during application) and future unexpected bills (our duty when assessing affordability)
Subsidised living alert - pivotal in identifying instances where an applicant may be relying on revolving credit for essential expenses, such as groceries.
Indicative disposable income alert
Using Open Banking data, discretionary spend is calculated. This is equivalent to the wants and commitments used for the 50/30/20 budgeting rule. The figure is the amount that remains after deducting needs from income. In the example below this is £1,268.
Not all discretionary spend is available for repaying loans. Capacity to repay other unexpected expenses must be catered for. Furthermore it is realistic to expect an applicant to spend something on their ‘wants’. A common proxy for disposable income is to take 35% of this discretionary spending. In the example below this is £444 (35% of £1,268).
Using the data from the credit bureau, the current repayments are calculated. These are taken from the active repayments table and will match the monthly repayments in the indebtedness tab. In the example below this is £95.
The Gross surplus is what is left for the applicant to repay their loan. In the example below this is £349.
The proposed repayment for the loan applied for is then deducted from the gross surplus (in this example £48).
The net surplus is the amount that remains after deducting the proposed loan repayment (in this example £302).
The alert will either be green, amber or red depending on the value of the Net Surplus. The alert will be:
GREEN where the net surplus is positive by more than £50
AMBER where the net surplus is more than £0 but less than £50
RED where the net surplus is negative
This alert and the indicative disposable income card will give you a snapshot of whether or not the proposed repayment is affordable and sustainable over the loan term.
Subsidised living alert
The subsidised living alert looks at the running balance history of each of the connected bank accounts. Additionally it considers the revolving debt ratio calculated using data from the applicant’s credit report.
An Amber Alert is triggered when the applicant’s balance has been less than £50 for more than 10 days (not necessarily consecutive) on at least one of their accounts over the last 90 days.
This alert suggests an applicant doesn’t have much of a financial buffer against unexpected expenses. A large unanticipated bill may make it harder to meet their other financial commitments.
A Red Alert is triggered when an applicant maintains a low balance (as detailed above) AND when their revolving credit ratio is in excess of 75%.
This alert suggests that an applicant may be using credit to meet day to day living costs (because their running balance is consistently low).
Green means that the applicant has maintained a balance above £50 in each of their connected bank accounts for at least 80 days out of the last 90. As a result, there are no immediate concerns regarding subsidised living. However, the applicant may still have a revolving credit ratio in excess of 75% and this should be considered as part of your indebtedness assessment.
Conclusion
The Alerts sub-tab in Spending is a valuable tool to support creditworthiness assessment. It offers clear, colour-coded warning based on specific affordability criteria, enabling Loans Officers to make more informed affordability decisions. These alerts, together with the other Open Banking income and expenditure information provides a comprehensive view of an applicant's financial habits, contributing to a more rounded and accurate risk assessment.