Credit Scoring Model Bucks the Industry Line on Paid Debts

When unpaid bills go to collections agencies, the consumers' credit scores often suffer long after they pay off the debts.

The practice of penalizing consumers' scores for paid collection accounts has sparked howls of protest — particularly in the baffling realm of medical billing, where patients routinely haggle with health insurance providers over responsibility for payment.

Complaints about the practice have raised the threat that Congress might impose new rules. But now it looks at least possible that the private sector will be able to resolve the issue on its own.

VantageScore Solutions, which competes with Fair Isaac Corp. in selling credit scores to some of the nation's largest lenders, tells American Banker it has removed paid collection accounts from its latest credit scoring model. The company is believed to be the first in the industry to make the change.

VantageScore says cold, hard numbers motivated it to make the change. The company was trying to build a model that offered the best possible predictions of consumer behavior, and its mathematicians determined paid collections accounts are a poor predictor of default.

"At the end of the day, the mathematics had to win out from an objective standpoint, and not from a subjective standpoint," says VantageScore President and Chief Executive Officer Barrett Burns, though he is well aware of the controversy over counting unpaid collection accounts.

Sarah Davies, VantageScore's senior vice president for analytics, says she compared the risk profile of consumers with paid and unpaid collection accounts. "The risk associated with the unpaid was much, much higher," she says.

The move by VantageScore bucks the position staked out by the Consumer Data Industry Association, a trade group for credit reporting agencies. "Broadly speaking, a precedent of deleting adverse information once a delinquent debt is paid would seriously impinge on the quality of data," a spokesman for the organization told The New York Times last year.

The association sounded more flexible in an email to American Banker. A spokesman for the group stated that objective credit report data should be available to lenders, but added: "As the lender reviews its loan portfolio periodically, it might adjust the weights for certain factors or discount those factors entirely based on its loss experience." (Fair Isaac, the leading score provider, says the damage to a consumer's score from a collections account varies depending on factors such as whether other negative information is on file.)

Most of the consumer complaints regarding the use of paid collections data have focused on the medical sector.

Legislation that passed the House in 2010, but has stalled since then, would bar credit agencies from using paid-off medical debt in assessing a consumer's creditworthiness. That legislation has drawn support from consumer groups and industry organizations such as the Mortgage Bankers Association.

The move by VantageScore is arguably more sweeping than the legislation, because it dispenses with considering any paid collections accounts, medical or otherwise. And VantageScore's model will treat debt as having been paid off in instances where the debt is settled for less than the amount initially charged, according to the credit scoring company.

A congressional aide who supports the legislation calls VantageScore's announcement encouraging.

"Taking them at their word, it sounds to me like they've decided that the bill makes a lot of sense, and they're just going to do it," the staffer says.