Credit bureaus and lenders are always looking for better ways to assess risk with credit scoring systems. It is in their best interests to do so – better prediction of risk should save money through lower default rates – but it is also in the interests of consumers to have a system that does not unfairly penalize them.
Previously, we mentioned an effort by the three major credit bureaus (Equifax, Experian, and TransUnion) to jointly create an updated scoring system with a focus on increased accuracy and understanding. That effort has come to fruition with VantageScore 4.0, which is scheduled for a fall 2017 debut for consumer use.
“Lenders and other users of credit scores need more out of their scoring models,” said Sarah Davies, senior vice president for research, analytics and product development at VantageScore Solutions. “In VantageScore 4.0, we’ve developed a tool that provides benefits associated with portfolio growth, consumer fairness, inclusion and model governance. These are areas of concern for lenders and their regulators as well as consumers and those who advocate on their behalf.” The final rollout of VantageScore 4.0 incorporates three primary improvements:
1. Use of Trended Data – Credit scores generally capture the state of your credit at any one point in time. Trended data looks at behavior over time to smooth out inconsistencies.
For example, credit scores calculated at the peak of your charges for the month (right before you pay the bill) will give the impression of being regularly closer to your credit limit than you really are. Your credit utilization appears high, and your credit score suffers as a result. The new VantageScore system will look at overall trends in your credit utilization to give a more accurate risk picture.
2. More Selective Use of Public Records – The credit bureaus have agreed to remove certain public records that contain adverse information but are not necessarily good predictors of risk. Many judgments, tax liens – even traffic tickets will fall into this category.
Because of their unplanned nature and quirky reimbursement patterns, medical expenses are also treated differently in the new system. Unpaid medical collections are ignored if they are six months old or less, and after that time, they are not given the same weight as other forms of bills in collections.
3. Use of Machine Learning – When there is little information to go by in assessing credit risk, conventional scoring models become less accurate. Lenders tend to assume conservatively that little information equals high-risk.
Machine-learning technology can extract information from other sources by reviewing large databases and correlating certain consumer behaviors with on-time bill payments. In turn, those consumer behaviors become better predictors of responsible credit behavior. VantageScore Solutions claims that the new system scores some 30-35 million consumers who cannot obtain a credit score when conventional scoring methods are used, and a predictive "performance lift of 30% among the population of consumers with sparse credit files."
The VantageScore system is not guaranteed to raise your credit score, and it has the potential to lower it in some cases – for example, if you are trending toward carrying increasingly larger balances because of a few unexpected expenses. For many consumers who are difficult to judge or haven't been seeing the benefit in settling old debts through responsible behavior, credit improvements should follow.
VantageScore 4.0 represents a major step forward as it takes on the well-known FICO scoring system created by the Fair Isaac Corporation. If VantageScore 4.0 does prove to be a better predictor of consumer creditworthiness, it may take significant market share. Consumers should benefit as a result without having to take any action at all.
Even so, you should take positive action to keep your credit score high through responsible behavior like always paying bills on time and keeping your spending under control relative to your income. Check your credit report to make sure it is accurate and reflective of your good habits. As Rod Griffin, Director of Public Education at Experian says, "If you take care of your credit report, your scores will all take care of themselves."
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.