Study examines score impact of ignoring sold-derogatory debt

Date: June 25, 2020

Lenders in recent months have grown concerned about how best to handle the reporting of sold-derogatory trade lines, often referred to in the industry as “sold-derogs,” to the three national credit reporting companies (CRCs), Equifax, Experian and TransUnion.

Sold-derogatory trade lines are severely delinquent debts that are sold off to debt-collection agencies. Some consumers have complained that these debts continue to appear as delinquencies on their credit reports, even after the debts are discharged through bankruptcy, and those complaints have drawn scrutiny from regulators, including the Consumer Financial Protection Bureau (CFPB).

As a possible remedy, some lenders are considering the idea of ceasing to report these delinquencies after they are sold to collectors, an option that also has sparked lender concern. If unreported sold-derogatory trade lines no longer appear in consumers’ credit files, then credit-scoring models could not factor those accounts into credit-score calculations. Lender are wondering how this change would this impact credit-scoring accuracy.

In response to lender requests, VantageScore Solutions conducted a study into the effect that the absence of sold-derog accounts would have on VantageScore 3.0 credit scores and their predictive accuracy. The results are detailed in the most recent VantageScore white paper, “Impact of Sold-Derogatory Trade Lines on VantageScore 3.0 Credit Scores.”

Using a sample of 4.3 million consumers’ credit files randomly selected from the CRCs, the study found that VantageScore 3.0 credit scores were largely unchanged by the removal of sold-derogatory trade lines. In fact, most (59 percent) of the consumers tested had experienced no score change, and an additional 28 percent experienced changes of 20 points or fewer.

Ultimately, the study revealed that the majority of consumer profiles are not affected by the elimination of a sold-derogatory trade line in consumers’ credit history and there is no breakdown in the score’s predictiveness.