Consumers want credit scores that are fair. Lenders want to know that the credit scores they use do a good job of predicting whether people will pay their bills on time. And those two goals sometimes seem to be at odds, at least judging from comments we hear from consumers about their scores. Consider these three complaints we hear again and again at Credit.com:
- Why doesn’t paying off collection accounts help my credit scores?
- I don’t need any credit now. Why should I have to get a credit card or borrow money to have a strong credit score?
- My credit was hurt during the recession but I was a good credit risk before. Why haven’t credit scores taken into account that many people’s credit was affected by the economic downturn?
A new version of the VantageScore, a competitor to FICO scores, may make these consumers whole lot happier. And if it helps lenders make better decisions as its creators claim it will, it has the potential to shake up the credit scoring industry.
No More 7-Year Sentence for Collections
VantageScore 3.0, which was unveiled to the public this week, features some changes we have heard consumers request in the past. In particular, the way it evaluates collection accounts is sure to resonate with anyone who has ever had a medical bill or nuisance bill wind up in collections. In this scoring model, paid collection accounts no longer hurt consumers’ credit scores.
“Unpaid collections are most predictive,” says Sarah Davies, senior vice president of analytics and product management at VantageScore Solutions LLC. Unpaid collection accounts of any amount and any type (including those for medical bills) hurt consumers’ scores. But once they are paid or settled, they no longer count when these scores are calculated.
This means consumers with collection accounts on their credit reports no longer have to feel like they are being penalized for the seven-and-a-half years those accounts are reported.
This won’t solve all problems with regard to the damage collection accounts can create. “In some cases, we don’t think it’s right to pay off all collections,” warns Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group. “Sometimes they are wrong or the statute of limitations has passed. It might not even be that person’s debt. We think it’s a terrible thing that they can put this collection account on a credit report without really validating that it’s that person (who owes the debt).” But, overall, she believes this change is a step in the right direction.
More New Scores Than Texas
Another change: VantageScore claims to now be able to provide credit scores for a greater number of consumers; about 13 million more than previous versions of the model, which already claimed to score about 14 million more consumers than its competitors, for a total of 27-30 million more people than would get credit scores under traditional models. “That’s greater than the entire population of the state of Texas,” Davies says.
As Barry Paperno, Credit.com’s credit scoring expert, pointed out in an article that compared FICO and VantageScore credit scores, to be able to calculate a credit score on a consumer, FICO requires at least least six months of account history with at least one account reported in the past six months. VantageScore, on the other hand, requires only one month of history and an account reported to the agency within the past 2 years.
VantageScore 3.0 expands that and also produces scores for consumers who:
- Weren’t using credit often but did use it in the past 24 months.
- Have no open accounts. These are often consumers who fall into the “subprime” category such as those who have been through bankruptcy and subsequently stopped using credit, or those whose only listed accounts are collection accounts or other negative information.
- Show no recent activity at all on their credit reports. The last information reported about them may have been 3 – 4 years ago. “These consumers are relatively good quality,” Davies notes. “71% have a credit score of 600 or higher. They have few delinquencies and have had accounts for a long time but don’t use them much.”
“This is another encouraging step in the evolution of credit scoring,” says Steve Ely, president of eCredable.com, a consumer reporting agency that helps consumers build credit scores using payment information from bills not typically reported to credit reporting agencies. “Vantage has demonstrated that using data beyond the traditional data used to create FICO scores is indeed useful, and predictive for lenders to assess risk. All the major credit reporting agencies show released scores which use ‘alternative data,’ but very few lenders have actually implemented these scores in any significant fashion.”
This approach to scoring may prove to be particularly helpful to immigrants, those who stopped using credit during the recession, and retirees who see no reason to take out loans or use credit cards. It’s worth noting, though, that VantageScore produces scores for millions more consumers using only data from traditional credit reports. In other words, they aren’t tapping other databases to find the information they need to create these scores.
Not All Mortgages Are the Same
Finally, the third major innovation in the new VantageScore is the way it drills into details about how consumers have handled credit before, during and after the recession. As Charles Chung, president of decision analytics North America for Experian says, “We looked at data that spanned a longer period of time. We looked at data before and after the recession. That was really important because behaviors in the credit environment have changed and credit scores have not captured that.”
And the level of detail this score evaluates is also more detailed; both Chung and Davies repeatedly referred to it as “more granular.” Davies gives this example: In traditional scoring models, a real estate loan is a real estate loan. But in VantageScore 3.0, a first mortgage is treated differently than a home equity line of credit. “First mortgages have a default rate twice that of HELOCs,” she says. “The behavior is very different.”
Paperno agrees that this kind of change could be a big deal. “For the most part, installment loans are treated similarly in existing versions of the scores, whether they are student loans or mortgages,” he explains.
My Score Is Better Than Your Score
He warns though, that until lenders begin using the new VantageScore 3.0, it’s hard to verify the claims that the model is significantly more predictive, and lenders know the mileage will vary. “I equate it with (the claims that) new and improved Tide makes your laundry 10% whiter.” He adds that “Credit scores can only be judged accurately in hindsight. Either people paid their bills on time or didn’t.”
Chung is confident that the score will be popular with both consumers and lenders. “To think there is no room to improve predictiveness of credit scores is incorrect,” he says. “We have thousands of clients that are using (VantageScore scores) today. The industry was looking for something better.”
Sherry agrees that it may be time for a change. “I think it would be good if there is more competition in scores,” she says. “Maybe it would create more innovation in the industry.”
VantageScore 3.o is in testing with lenders. It is expected that it will be available to consumers beginning in the summer of 2013. Consumers can compare their VantageScore 3.0 to an Experian credit score with Credit.com’s free Credit Report Card. And they can visit the new microsite, ReasonCode.org, to learn more about the factors that are used to score your credit history.
Image: John Foxx