Impact of AI on Assessing Individual’s Creditworthiness

Checking one’s creditworthiness is a very intricate subject, as all their previous financial behaviour is comprehensively perused. All the weighted parameters are assessed and combined together to form one’s Credit Score, which is the tool used by the banks/lenders to find out people’s creditworthiness.

But what about the people who are new to credit? Since they don’t have any financial history, their credit score can’t be calculated. Hence, majority of the times, they are unable to get any credit. For people who have already availed some line of credit in the past, it is relatively easier to gauge their Credit Score as all the information required for the same is available with the Credit Bureaus. This follows a certain paradigm that dictates that your past will affect your future. So, if you have been a delinquent borrower in the past, it’s going to reflect in your future credit score analysis as well.

But it doesn’t take into account those people who have become more responsible now but have nothing to show for it. So how can these people who are deemed undeserved and who are new to credit get the best credit available for them?

How AI Helps in Assessing People’s Creditworthiness

Artificial Intelligence goes beyond the traditional data used to determine people’s creditworthiness. All the data the people share is pooled together and machine learning is used to analyse the data to correlate it with the criteria provided by the lenders.

This data includes both the traditional data; i.e. past payment records, credit age, utilization ratio; and alternate data; i.e. digital footprint, employment status, etc. Hence, all the past and current behaviour of people is comprehensively analysed and used together to gauge their creditworthiness. So, for people who have only recently showed a responsible behaviour or who are new to credit, Artificial Intelligence is a great means to get them on track with their financial aspirations.

What It Means for Lenders

So far, we have discussed about people’s behaviour change for the better, but it can very well be the other way around. People who were responsible before could likely show just the opposite behaviour in the future due to certain circumstances. Similar to how Artificial Intelligence helped in bringing the creditworthy people to light, it can also help determine the potential delinquents.

This is a great asset for lenders as they are able to better distinguish the creditworthy and potential delinquents, and can set the lending terms accordingly for each group.

AI’s Effect on Overall Lending Industry

With a better know-how of the potential risk that comes with each borrower, more and more lenders are adopting Artificial Intelligence to determine the creditworthiness of people. Even though it’s still at a nascent stage, it has still managed to change the dynamic of lending industry with better understanding of the creditworthiness of people, and is expected to bring about a revolution in this industry in the near future.

By Ranjit Punja is the CEO and Co-Founder of CreditMantri