A new index of creditworthiness for retail credit products

Abstract

This paper introduces a novel family of indexes to describe borrowers’ creditworthiness in retail credit products, both for fixed term loans and for open-ended products such as credit cards. Each index is the ratio at a given time of the net present value of actually received cashflows to the contractual ones. Some interpretations of the indexes are given and it is also described how to link them to the profitability of the credit financial operation. For open-ended products, a competing risks survival analysis methodology is proposed to estimate the cashflow returns and illustrated with a simulation.

Keywords:

• credit scoring
• retail credit
• profitability
• creditworthiness
• fixed term credit product
• revolving credit product

Acknowledgements

The authors are pleased to thank the referees for their interest in the subject and very helpful comments.