The 1990s brought us a wealth of innovative technology, including the Blackberry, Windows 98, and Nintendo. As much as we loved those inventions, we moved on to enjoy better technology when it became available, and now have smartphones, Windows 10 and Xbox. Similarly, technological and modeling advances have been made in the credit scoring arena, with new software that brings significant benefits to lenders who use them.
Later this year, FICO will retire its Score V1, making it mandatory for those lenders still using the old software to find another solution. Now is the time for lenders to take a look at their software and myriad reasons to move to a modern credit score solution.
As many as 70 million Americans either have no credit score or a thin credit file. One-third of Millennials have never bothered to apply for a credit card, and the percentage of Americans under 35 with credit card debt is at its lowest level in more than 25 years, according to the Federal Reserve. A recent study found that Millennials use cash and debit cards much more than older Americans. Over time, Millennials without credit histories could struggle to get credit.
Are there other data sets that provide a window into whether a thin file consumer is creditworthy or not?
Modern credit scoring models are now being used in the marketplace without negatively impacting credit quality. For example, VantageScore 3.0 allows for the scoring of 30 million to 35 million more people consumers who are typically unscoreable by other traditional generic credit models. VantageScore 3.0 does this by using a broader, deeper set of credit file data and more advanced modeling techniques. This allows the VantageScore model to more accurately predict unique consumer behaviors—is the consumer paying his utility bill on time?—and better evaluate thin file consumers.
In today’s ever-changing regulatory landscape, lenders can stay ahead of the curve by relying on innovative credit score models like VantageScore. These models incorporate the best of both worlds by leaning on innovative scoring analytics that are more inclusive, while providing marketplace lenders with assurances the decisioning is both statistically sound and compliant with fair lending laws.
Newer solutions also offer enhanced documentation to ease the burden associated with model risk management and regulatory compliance responsibilities.
Consumer credit scores can vary depending on the type of scoring model a lender uses. If it’s an old, outdated version, a consumer might be scored lower. If it’s a newer, more advanced model, the consumer has a better shot at being scored more fairly.
Moving to a more advanced scoring model can help broaden the base of potential borrowers. By sticking to old models—and older scores—a sizable number of consumers are left at a disadvantage in the form of a higher interest rate, lower loan amount or even a declined application.
Introducing advanced scoring models can provide a more accurate picture of a consumer. As an example, for many of the newest consumer risk models, like FICO Score 9, a consumer’s unpaid medical collection agency accounts will be assessed differently from unpaid non-medical collection agency accounts. This isn’t true for most pre-2012 consumer risk score versions. Each version contains different nuances for increasing your score, and it’s important to understand what they are.
Upgrading your credit score to the latest VantageScore credit score or FICO solution is easier than you think, with a switch to a modern solution taking no longer than eight weeks and your current business processes still in place.
Are you ready to reap the rewards of modern credit scoring?