What is Payment shock?
Risk
Payment shock happens when the installment a customer faces rises sharply against what they had been paying, due to a higher amount, a change of term or the end of a promotional period. It is a frequent cause of delinquency among customers who had been complying.
Why it matters
A customer can have good behavior and still stop paying if the monthly requirement spikes. The deterioration comes from product design, not from the profile.
That is why gradual growth strategies look at the change in installment, not only at the approved amount.
- Explains delinquency among customers with good payment history.
- Prevented by capping the installment jump between periods.
- Relevant when increasing limits and when refinancing.
Common questions
How do you avoid payment shock?+
By capping how much the installment can grow from one period to the next and checking the new amount against estimated affordability, instead of raising the limit just because the customer has been complying.
Related terms
Affordability
Affordability is how much a person can put toward loan installments without compromising essential expenses. It is estimated from their income and existing obligations, and it defines the maximum reasonable amount to grant.
Alternative data
Alternative data are non-traditional information sources —transactional behavior, open banking, device data, telco or utilities— that complement the credit bureau to assess applicants with little or no history. They make it possible to lend to populations traditional scoring can't reach.
Champion/Challenger testing
Champion/Challenger is a technique for improving credit policies by routing a share of traffic to an alternative policy (the challenger) and comparing its performance against the one in production (the champion). It lets teams validate changes on real data at controlled risk before adopting them.
Back to the full glossary.
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