Psychometrics

Psychometrics refers to a research field related to psychological measurements. 

For example, scientists may conduct a psychometric test to assess a person’s intellectual abilities, personality traits, emotional state, mental health, and more.

Such research methods are widely used in various industries, including education, employment, and clinical psychology.

Another area that relies on psychometric assessments is finance.

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Psychometric: meaning in the context of lending

What is psychometrics in the context of credit risk? It is a method for assessing a borrower’s creditworthiness based on their psychological and behavioral characteristics.

Lenders use psychometric testing as a supplement to traditional credit scoring methods, which consider only the applicant's financial information, such as their financial history, credit reports, and transaction data.

Unlike traditional credit scoring models, psychometrics measures personal traits that are harder to see, such as:

• Honesty
• Responsibility
• Risk inclination
• Financial discipline
• Cognitive abilities

And other personality traits that can predict the borrower’s behavior regarding debt repayment.

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Psychometric assessment test vs digital footprint analysis

Psychometrics is actively used by lenders in the process of assessing credit risks. 

There is another alternative method of credit scoring - digital footprint analysis.

It is no secret that user interaction on the Internet leaves certain information behind. 

These are publicly available data from social media accounts, details about online transactions, information about subscriptions to various online services, and more.

All this makes up a person’s digital footprint. And it is also extremely informative for the lender.

In essence, this method of credit risk assessment can also provide insights into an applicant’s character traits and behavioral patterns.

For example, turning to the services of alternative data providers allows the following conclusions to be drawn:

• Nighttime purchases may be interpreted as a sign of impulsiveness.
• Overdue payments on online subscriptions as an indicator of poor financial discipline.
• Registration on gambling platforms is a tendency toward risk-taking.
• Upgrading subscription levels or making regular, large transactions, as proof of stable financial standing.

Despite certain similarities between these methods, they should not be equated.

Here is how they differ:

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In practice, credit institutions rarely choose between these methods of credit risk assessment.

Credit scoring model assessment proves that the most effective models are those that combine both approaches.

This allows for:

• More accurate evaluation of thin file clients.
• Increased efficiency in risk prediction.
• Enhanced credit decisioning.
• Effective fraud prevention.

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