Personal Credit and Financial Vulnerability

Abstract

Rather than a narrow focus on risk of default, this paper advocates for lenders to take a broader data-led approach to tackling the challenges posed by financial vulnerability due to its latent and transient nature. Earlier identification and intervention when customers are experiencing financial hardship may help prevent default. Firstly, we consider how macro and micro data sources, in combination with emerging theoretical frameworks that conceptualise financial vulnerability, could be used by lenders for earlier identification of vulnerable customers. Secondly, we look at tailored interventions that could help financially vulnerable consumers once they have been identified, with passive and active methods inspired by protective efforts currently underway within the gambling industry. Lastly, when consumers do enter the arrears process, we highlight how lenders have a responsibility to help mitigate cognitive biases and promote behaviours that will help consumers escape perpetual debt.