Financial Inclusion

Credit Scoring’s Ten-Year Scorecard

Ten years ago, the three national credit bureaus got together to start a challenger to credit scoring’s dominant player. Out of that, VantageScore was born, and its new scoring model eventually gave 30 million-35 million consumers a score and access to credit. VantageScore President and CEO Barrett Burns sat down with Karen Webster to talk about what the last 10 years means for the future of credit scoring and the lending industry overall.

Ten years ago, many believed the credit scoring industry was ripe for disruption and innovation.

The three national credit bureaus — Equifax, Experian and TransUnion — were hearing complaints from large lenders.

Consumer debt was rising and finding new potential borrowers was getting harder.

Lenders were frustrated by differences in consumer scores provided by different bureaus.

So, convinced that better credit scoring technology could solve these issues, Equifax, Experian and TransUnion got to work creating a competitor to the entrenched competitor and “gold standard” FICO. They assembled a task force of data scientists and challenged them to build a credit scoring model that could be more predictive, could provide scores for more people without increasing risk, and create more consistent scores across bureaus.

Out of this work, a new credit scoring model was created, VantageScore, and the independent company that would manage its operation, VantageScore Solutions.

VantageScore’s President and CEO Barrett Burns says breaking out of “legacy thinking, architecture and systems” was no easy feat.

But, by essentially starting with a blank slate, Burns said the company was able to recognize and test new regulated data coming into the marketplace, such as rent, utilities and telecom, that would eventually lead the company to a new scoring model that brought millions of people into the realm of being scoreable borrowers.

“We found out that [rent and utility data] could indeed create more predictiveness [of creditworthy behavior]. For instance, we also challenged the history of penalizing consumers for not using credit for six months or more,” Burns explained.

VantageScore’s most recent model, VantageScore 3.0, also ignores paid collections, including medical collections.

By challenging the long-standing theories surrounding what “creditworthiness” really meant, VantageScore could “broaden the window” of scoreable consumers who were once considered by traditional credit scoring methods as unscoreable.

While “broadening the window” and scoring a higher number of consumers sounds like a positive development, the initial reaction is that these newly scored consumers might be less creditworthy than those scored by conventional scoring models.

That, Burns noted, is a myth. “Lenders can broaden their applicant base without lowering credit standards,” he explained.

Take infrequent borrowers. Different ethnic groups have different borrowing behaviors – and may exhibit infrequent borrowing behaviors out of choice and not because they are credit risks.

And since the recession, consumers and lenders alike have altered their behavior to reduce taking on debt. Many creditworthy people just made a decision not to use credit and to really pull back.

Traditional credit scoring models penalize consumers for making those choices, Burns said, but newer models are picking up on and accounting for that post-recession behavior.

“The standard operating procedure is to not score someone after six months, for example,” Burns noted. But VantageScore’s model has allowed 7.2 million consumers to get a score of 600 and above.

“It’s thrilling to be able to offer an alternative to people to get away from predatory lenders. Even if someone doesn’t get a good score with us, it then gives the opportunity to learn how they can improve their score,” Burns explained.

Despite all the progress that VantageScore has made in the last 10 years, including giving 30 million to 35 million people a credit score, it’s clear there is still work to be done.

The next 10 years, Burns says, will be defined by four things: consumer education; continuing to refine scoring models so that more people can get more scores while staying consistent and accurate; continuing to use regulated data; and remaining accessible to lenders and consumers alike.

What’s also top of mind for Burns when looking to the future is how to stay progressive, contemporary and innovative in an industry where it’s very easy for bureaucracy to creep in.

“Show me an older company and I’ll show you a company that’s probably bogged down in bureaucracy and legacy thinking,” he explained, noting that staying fresh and innovative so as to not get hung up in a legacy mindset is always at the forefront.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out the February 2019 PYMNTS Digital Fraud Tracker Report

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