Experian, one of the three major credit reporting bureaus, claims its new VantageScore technology can segment subprime borrowers, leading to a more accurate risk assessment for banks and lenders.“VantageScore’s innovative scoring technology helps lenders more accurately assess risk, specifically in the subprime consumer segment,” says Kerry Williams, group president, Credit Services & Decision Analytics at Experian.
“By providing a more holistic view and a finer definition of the data in the credit profile, VantageScore allows credit grantors to make more precise and predictive lending decisions.”
Traditional credit scoring models typically group subprime borrowers into one segment, but VantageScore claims to further fragment borrowers within certain subdivisions.
A recent Experian study involving a sample of more than 40 million subprime consumers with mortgage tradelines found that nearly 20% of consumers originally classified as “subprime” using traditional credit scoring technology were re-classified into lower-risk categories using VantageScore.
The hope is that borrowers who were deemed subprime in the past may be entitled to lower interest rates and a broader range of financing options in the future if considered less risky and prone to default.
It is believed that the scoring system will also weed out borrowers who falsely bumped up credit scores by purchasing tradelines from other borrowers with solid credit history.
VantageScore, which was developed by Experian, Equifax, and TransUnion and introduced to market in March 2006, is a relatively new credit scoring technology that hasn’t been adopted by many lenders yet.
According to the Fair Isaac website, 90% of the 100 largest US banks use FICO® scores to assess a consumers’ potential risk.
However, many subprime lenders and critics have pointed the finger at Fair Isaac’s Fico score recently, claiming it did a poor job of accurately predicting risk.
“FICO scores were one of the best predictors of early defaults,” said Glenn Costello, an analyst with Fitch Ratings, a credit-rating agency based in New York. “Today, that is not true.”
Ron Totaro, vice president of global scoring solutions for Fair Isaac responded to critics, saying “We’re confident that FICO does what it is supposed to do.”
“Lenders develop their lending strategies, and they use as little or as much information as they want.”
I have to agree with Totaro to some extent, as banks, lenders, and investors ultimately decide on minimum credit requirements, and have the option to either scour a credit report, or simply glance at the three-digit score, which may be inflated (or deflated) for a number of reasons.
