This paper examines whether external credit agency reports offer valuable information to peer-to-peer (P2P) online lending platforms. In contrast to studies that have explored the relationship between borrowers’ static credit scores and their default probabilities, this study focuses on changes in borrowers’ FICO credit scores and the effect of these changes on default probability and breach severity (default ratio). This study is based on data from Lending Club, the world’s largest online P2P lending platform. The empirical results indicate that changes in the borrowers’ FICO credit scores convey valuable information after controlling for borrowers’ credit risk grades, risk characteristics, and original FICO credit scores. The default probability and ratio increase substantially when borrowers suffer FICO credit score decreases. By contrast, for borrowers who experience credit score increases, the default probability and ratio significantly decrease. The results suggest that the performance of borrowers exhibits a symmetrical reaction to FICO credit score changes.
P2P lending, lending club, credit risk, default probability