Credit limit management in consumer lending
There are two major moments when the credit limit is to be evaluated for a customer in BNPL/Consumer lending. The first is new loan underwriting. The second is during upselling and cross-selling stage. Sometimes forgotten, yet also important part is credit limit re-evaluation based on behavioral signals during portfolio monitoring.
In new loan underwriting, we need to evaluate the credit risk of the potential customer and set the credit limit considering historical data like payment records and borrowing behaviors. For example, if a customer has been paying on time and using credit responsibly, she is likely to have a higher credit limit.
When a customer is already an existing customer, we need to evaluate whether she is a good customer who is unlikely to default. If she is, we can offer her a higher credit limit. If she is not, we need to be cautious about offering her a higher credit limit.
There are several factors to consider when setting or adjusting a credit limit:
- The customer's credit score
- The customer's credit history
- The customer's income and employment stability
- The customer's current debts
- The customer's spending habits
- The customer's other assets
- The customer's age
- The customer's history with the company
- The customer's repayment history
- The customer's overall financial health
Traditionally, companies choose to change credit limits only upwards. But in some cases, it may be necessary to lower a customer's credit limit. Reasons for lowering a credit limit may include:
- The customer has missed payments or been late on payments
- The customer has maxed out their credit limit
- The customer has a high debt-to-income ratio
- The customer has been approved for a new loan with a higher interest rate
- The customer has applied for a new credit card
- The customer has been laid off from their job
- The customer has filed for bankruptcy
- The customer has a worse credit score than when they were originally approved for the credit limit.
The process of evaluating and adjusting credit limits is not something that should be taken lightly, especially during the worsening macroeconomic situation. The best way is to regularly on a weekly basis run portfolio evaluation using internal data and monthly portfolio evaluation with the help of credit bureau checks.
The best way is to have standard limit calculation and reuse the decision logic in decision strategies for all - credit underwriting, cross-selling, and portfolio limit monitoring.