How the world of credit scoring has changed over the past decade
by John Ulzheimer
The Ulzheimer Group
When credit scoring was invented several decades ago, nobody could foresee its evolution into a cornerstone of credit risk assessment. Technology capable of normalizing reams of credit file data into a single three-digit number revolutionized the world of consumer lending. Credit scores allowed lenders to build centralized credit policies around the probability of default as expressed by a consumer’s score. This has allowed lenders to make faster, more consistent credit decisions without increasing their exposure to defaults.
The past 10 years have seen considerable changes in the credit scoring landscape. Since 2006, we’ve seen the introduction of a new credit scoring platform (the VantageScore credit scoring model); a considerable increase in the opportunities for consumers to gain no-cost access to their credit score information; and greater consumer awareness about how credit scoring works and its influence. And there’s really not much to suggest the next 10 years will be any less exciting.
First and foremost, the VantageScore credit score turns 10 years old this year. In 2006 the three national credit reporting companies, Equifax, Experian and TransUnion created the VantageScore model to offer lenders the ability to choose another generic credit scoring model. Over the past 10 years the number of VantageScore credit scores procured went from zero in 2006 to 3 billion in 2014 to 6 billion in the 12-month period from July 2014 to June 2015. It seems like the experiment has been a success.
In addition to lenders, consumers have seen their fair share of beneficial changes to credit scoring over the past 10 years. For example, 10 years ago medical collections appearing on consumer credit reports were treated the same way as any other type of collection. Such collections are not incurred voluntarily (because we don’t choose to get sick), and many collections involved bills that were covered by health insurance policies, but not paid promptly by insurers. Yet these collections could be as damaging to a credit score as defaulted credit cards, apartment leases and other voluntarily incurred debts that had gone into default.
Today’s newest credit-scoring systems either ignore paid medical collections or discount their potential negative impact on your credit score. (The VantageScore 3.0 model ignores all paid collections, including medical debts.) And a settlement between the credit reporting agencies and some 32 state attorneys general will eventually require the national credit reporting companies to delete medical collections from credit files as soon as those collections have been paid by an insurance policy, which means they’ll have no impact on your credit score.
Normalizing the scale range
Despite the fact that there are over 5 dozen different credit scoring options commercially available to lenders, nearly all have a published scale of 300 to 850. I could not have written the same thing 10 years ago. (The VantageScore 1.0 and 2.0 models still use a scale of 501-990; a table for converting the scores they provide to the VantageScore 3.0 scale of 300-850 can be found here.) While different models will still produce different scores for any given credit file, uniformity in scale range simplifies credit scoring. There’s a lot less head-scratching over questions like “Why is my score 900 on this website and 780 on that website?”
Considering rental- and utility-payment history
Something else I couldn’t have written 10 years ago is that credit scoring models now consider the rental, telecom and utility payment history found in your credit reports. Today all of the newest scoring systems will consider your apartment rent, your utilities, and your telecom accounts as long as they’re on your credit reports. This is a bigger deal than it may seem because it signals a departure from the largely “financial services only” model in the world of consumer credit reporting/scoring to a more inclusive set of financial obligations where proper management of these so-called “nontraditional” accounts can help your credit scores. (In the past, missed rent and utility payments could hurt your credit score if they were sent to collections, but there was no mechanism for rewarding patterns of timely payment.)
Legally required score disclosures
Thanks to amendments to the Fair Credit Reporting Act, as of 2011 if a lender uses your credit score as a basis for denying your credit application, then the lender is required to send you a notice that includes the exact numeric credit score they used. This score disclosure requirement is automatic, meaning you aren’t required to ask to see your score. And, you’re not going to see a credit score in the notice; instead, you’ll see the actual credit score used by the lender.
And, if your credit score was used by a lender and led to an approval but with terms (i.e., interest rates and fees) higher than the best ones offered by the lender (also known as an “adverse approval”), you are entitled to a Risk Based Pricing Notice, which must also include your credit score. These two newer, 2011 disclosure requirements supplement older disclosure requirements (levied on mortgage lenders/brokers way back in 2003), which require that your scores must be disclosed within a reasonable amount of time after you apply for a home loan.
More, more…and free
Access to credit scores has improved considerably when compared with the access available 10 years ago. A decade ago, you either had to buy your credit score or you had to sign up for a fee-based membership to some type of credit monitoring service in order to have access to a credit score. And there was no guarantee that the score you’d receive would be one commercially available to lenders and used in their decision-making processes.
Today there are dozens of places to get truly free credit scores, including websites that have distribution partnerships with credit bureaus, such as Credit.com, Credit Karma, and Quizzle.com, which allows them to give their registered users free access to their credit scores. Also included are companies that are giving away credit scores to their existing customers, such as USAA, OneMain Financial’s Springleaf.com, Discover Card and Capital One. The momentum behind the free credit score movement is impressive and isn’t slowing down one bit.