A credit score is a number that depicts a consumers 'creditworthiness'. The higher a credit score, the better a borrower looks to potential lenders. A credit score is based on several credit history factors including the number of accounts, balance of debt, repayment history, etc.
The trouble with numbers
Part 1: credit score is not the same as affordability
For one consumer individually, a credit score is not necessarily a good estimate of creditworthiness but for large numbers (millions), the credit score does a good job.
A good example of this are young consumers aged 18-34 with limited or no credit history. Due to a limited credit history or their lack of appetite for credit, they often have a lower credit score than older consumers with a mortgage or credit card.
Generally, a credit score may not adequately capture affordability, i.e. a consumer's ability to repay credit. Consequently, a consumer who was declined due to a lower credit score may still be able to afford a loan. Conversely, a consumer with a higher credit score may not be able to repay a loan.
Graph: Average credit scores by age in the US. Same is true for the UK population.
Part 2: a 'good' score today but a 'bad' one tomorrow
Many consumers are not aware of when factors may change their credit score. Consider this real life example. Sam had a very good credit score before moving home last year. He has no mortgage, credit card, loan, overdraft or car lease.
Six months later, the council finally notified credit bureaus about the changes. He moved only 1 mile. However, this update of his home address lowered his credit score. The subsequent change of utilities providers was considered as a "credit" activity by credit bureaus. Sam's credit score kept dropping. Finally, he opened a bank account with a new bank.
12 months later, Sam has no longer a good credit score but is deemed a high risk consumer by credit bureaus. In reality, he's better off than before. He saves more money every month as the rent is lower and expenses are down since lockdown.
Apart from moving home, other factors that could lower a credit score include i) opening a new bank account, ii) rolling over balance on a credit card, ii) getting a personal loan and iii) missing a payment for utilities or council tax. This list is not exhaustive.
Part 3: implied default rates for credit scores change
Credit scores rank consumers. They do help lenders estimate if one consumer is more likely to default than another. They do not help estimate the 'probability' of default for a consumer in absolute terms - not for one and not for many.
In other words, the same credit score implies a different probability of default for periods of economic decline and growth. A recession (economic decline) usually leads to a higher unemployment rate which in turn leads to higher 'loss' rates for lenders.
This means that a lender needs to increase the minimum credit score required if economic conditions deteriorate, even if the absolute risk appetite is unchanged. Sudden, external shocks such as Covid 19 and Hard Brexit adversely impact both existing and new loans. Thus, lenders will often be particularly cautious with new business because they have yet to determine the losses for the existing portfolio.
What does this 'change' mean for patient finance?
I expect all lenders (bank and non-bank) to ask for higher minimum credit scores, regardless of the type of credit (mortgage to credit card). Some lenders will even suspend new lending.
In turn, your acceptance rate will likely drop. It's really a function of the postcode areas for patients and the type of treatments you finance. Here's a map showing average credit score by area and age.
As a rule of thumb, implant patients are older so they typically have higher credit scores. Aligners patients under 30 tend to have lower scores and will likely see a sharper drop in acceptance rate. The good news is that Tabeo only performs soft checks for applications. Soft checks do not impact a patient's credit score.
How to respond?
In our next article, I will discuss strategies to balance the impact on your business.