VantageScore Solutions LLC, the company behind the VantageScore credit scoring model, announced Thursday the availability of a new white paper analyzing consumer score migration over time and how lenders can take these migrations into consideration to optimize their decisioning.
The study includes an analysis of VantageScore credit scores for two million consumers anonymized and randomly selected from the Experian consumer credit database. Using the VantageScore 3.0 model, which has a range of 300 to 850, the consumers’ credit scores were determined every quarter over a two-year period between 2011 and 2013.
Overall, the study found that over a three-month period, 49% of the consumers experienced a credit score improvement averaging 19 points, while 30% of consumers experienced a score decrease averaging 24 points. At 12 months, 51% of consumers demonstrated a credit score improvement of 27 points, while 38% had a credit score decrease of 34 points.
While consumer credit score migrations are common occurrences, they can have implications in terms of access to credit.
- Of the 65% of consumers who initially passed a 620 credit sore cut-off, 3% of the population subsequently failed the cut-off when they were re-scored three months later. At 12 months, 6% of the initial population failed the 620 credit score cut-off.
- Accounting for score migration above and below the credit score cut-off reveals that 6.4% of the total population would have received the opposite credit decision in light of the change in their credit scores if they had been reviewed three months later.
- The study also found that improving risk levels arising from a more stable economy partially offset the exposure related to a consumer with declining credit scores. The white paper cites an example of how the probability of default can shift from a 29% increase down to a 12% increase after factoring in the variance due to shifts in the economy.
"A central concern for lenders using credit scores is determining how the change in a consumer’s score will impact them over time," said Sarah Davies, senior vice president at VantageScore Solutions for research, analytics and product development. "The research demonstrates that a percentage of consumers are experiencing improvements in credit scores over a 3- or 12-month period. While consumer scores will change with some degree of frequency, lenders should incorporate clarifications to help determine whether they represent meaningful changes. Such factors should include improved risk levels arising from a stabilized economy, which may present an opportunity to lower cut-offs and increase access to credit."
Credit and risk strategies often include a binary decision on the consumer’s credit which is dependent upon the score value at the time of evaluation.
The white paper suggests that the combination of insights from two components of credit score model design can provide a framework for defining whether there is a meaningful change in a credit score. First, how risk and the odds that a consumer will default, change as the credit score changes. Second, the typical impact of credit management behaviors on a credit score will vary depending on whether those behaviors are high- or low-risk. By correlating these two components, lenders can better understand that certain activities such as inquiries and opening an account may not significantly increase the likelihood that the consumer will default.
VantageScore also suggests that lenders would benefit from capturing consumer credit scores on a quarterly or monthly basis in order to separate consumers with substantial credit score volatility from those with more stable credit scores.
VantageScore is the independently managed company that owns the intellectual property rights to the VantageScore credit scoring models - including the VantageScore 3.0 model that scores 30-35 million consumers typically not scored by conventional models. VantageScore’s predictive models use a patented and patent-pending tri-bureau scoring methodology that provides lenders and consumers with credit scores across all three national credit reporting companies. More than six billion VantageScore credit scores were used in 12 months by more than 2,000 lenders and other industry participants - including 7 of the 10 largest banks.