By Brian Davis
New credit scoring models could help extend credit to an additional 27-30 million borrowers − people who were previously turned down for real estate mortgages, auto loans and the like, but may become eligible based on better credit scoring.
VantageScore Solutions offers an alternative to the widely-used FICO (originally Fair Isaac & Company) scoring model, and measures some of the financial behavior common to lower-income people who often have no credit history under FICO scoring models. Their new model, VantageScore 3.0, includes such data as:
• rent payment history
• traditional credit data older than 24 months
• public records, collections and credit inquiries (which are also used by FICO, but VantageScore 3.0 weighs these more heavily if borrowers have little other data available)
• Includes a scorecard, for generating a credit score for borrowers with little data.
The data used by VantageScore is also more "granular" − separating out data that FICO scores tend to lump together. For example, if a borrower has several mortgages, VantageScore separates out which is for the primary residence, versus mortgages on second homes and rental investment properties.
Barrett Burns, VantageScore Solutions' CEO, further explains "Today's competitive lending environment dictates that lenders need access to as many creditworthy consumers as possible within their target universe, demanding the highest level of predictive performance from the credit scoring models they use."
Rental payment histories have always been controversial however, and it is currently only possible to collect this information from the largest property management firms − the kind with thousands upon thousands of rental units under management. Landlords with smaller portfolios are considered unreliable by most credit bureaus and scoring agencies, not to mention too disparate to practically reach.
VantageScore 3.0 is actually not alone in offering an alternative to traditional FICO scores; FICO itself has released an overhauled scoring model called FICO 8, which raises its focus to be more predictive of future financial behavior, rather than simply scoring borrowers on past history. Improvements are wide-ranging, and include:
• Less punishment for "moderate" credit inquiries
• High credit card balances are punished more severely
• Actively using credit accounts (rather than holding rarely-used credit cards often used solely to establish credit) will help credit scores more
• Less emphasis placed on small unpaid medical payments, which are often due to erroneous billing.
But even FICO 8 is purely optional for lenders to use, and most major banks and lenders have not adopted these new (and seemingly improved) scoring models. Large institutions tend to take a long time to adopt new technologies and techniques, and the massive lending banks from Wells Fargo to Bank of America are simply too bureaucratic to quickly respond to these improvements in scoring. And the catch-22 is that landlords and smaller organizations (who might act as early adopters) generally do not have access to these new credit scoring models for their tenant credit reports and loans, so the market for these alternative reports remains small for now.