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Score migration: understanding your account holders’ credit health
Many clients pull refreshed data on their booked accounts, including an updated risk score. You may be wondering why this piece of information is helpful. In today’s economic environment, financial institutions need to monitor how their customers’ credit scores are changing over time. Monitoring the migration of credit scores can serve two purposes. The first purpose is to reward customers who maintain good credit behavior. These customers should be the focus of cross-sell opportunities and attrition-reducing efforts. The second purpose is to manage customers who have decreasing credit behavior. By monitoring these customers, financial institutions will be in a better position to proactively address their loss potential. By understanding how credit scores change over time, financial institutions can better monitor the health of their portfolios.
VantageScore trends
The chart below shows the aggregated VantageScore distributions from December 2005 to June 2009 from a random sample of the Experian database.
*VantageScore is the first credit score developed cooperatively by Experian and the other national credit reporting companies. The scores used in the analysis were the valid scores from 501 to 990.
The trends indicate that economic factors have a delayed impact on credit scores. The Super Prime group (Score 901 to 990) saw the greatest percentage decrease from December 2008 to June 2009, with approximately 6 percent of accounts moving from the Super Prime score band to other score bands. The other score bands experienced minimal change from December 2008 to June 2009. Based on this information, we conclude that once the economy recovers, it will take many months for the recovery to be evident in applicants’ risk scores.
Although this analysis does not show how individual consumers migrate from one score band to another, it does show that credit scores on the aggregate are starting to migrate to the middle score bands as opposed to the higher and lower bands.
Individual score migration
Knowing how scores trend on the aggregate is a good first step to understanding the health of your portfolio, but understanding the individual account impact that score migration is having at the account level should also be tracked.
The credit scores for individual accounts can have the following changes from month to month, quarter to quarter or year to year:
- Positive change — Account’s score moves from one band to another in an upward direction
- No change — Account’s score stays in the same band
- Negative change — Account’s score moves from one band to another in a downward direction
The ultimate goal is to have all accounts moving in a positive direction, but based on external factors, that will not happen.
Positive change
Accounts that have a positive change in their credit score band indicate that the consumer is paying off his/her obligations in a timelier manner, searching for credit less often, and carrying smaller levels of debt exposure than previous time periods. The accounts that are moving in a positive direction are key accounts with which a financial institution will want to deepen relationships. By offering lower rates or cross-sell opportunities to meet the varying financial needs of these customers, the financial institution can prevent other institutions from stealing away these good customers. Keeping customers with improving risk scores will be a good source of revenue over time.
No change
Accounts that have had no change in their credit score band indicate that the consumer is treating his/her obligations in the same manner from time period to time period. These accounts are the institution’s stable accounts. The accounts are still making money for the financial institution, and, as the saying goes, it is more cost-efficient to keep an existing account than to spend money on acquiring new accounts. The accounts in the bottom score bands will need to be monitored to determine if preemptive action will need to be taken against these accounts.
Negative change
Accounts that have a negative change in their credit score band indicate that the consumer is having difficulty paying his/her obligations in a timely manner, is searching for credit more often and is carrying higher levels of debt than in previous time periods. The accounts that are moving in a negative direction are accounts that the financial institution must monitor more strictly.
Collections strategies may be created to handle these accounts specifically. New loan restructuring plans may also be developed to assist these account holders to ensure they don’t become a loss to the institution. Accounts that start in a high band and move to a lower band are probably the most troubling of all. External forces, such as a lost job or other issues, might be causing these consumers to be unable to meet their obligations as compared to previous time periods. Without the ability to monitor this type of score migration, financial institutions might think that these types of accounts are OK. Although the risk score still represents low risk, the reality is that strong action will need to be taken to prevent these types of accounts from going to a loss status.
Tracking score migration not only will be helpful during tougher economic times, but as the economy and your account holders recover, you also will be able to see the recovery and devise marketing strategies to attract additional business. Being able to understand how credit scores are migrating on an aggregated or individual basis will help financial institutions determine the overall health of their portfolio. How an account’s credit score is moving can assist the financial institution in finding ways to improve profitability even in these difficult economic times, while preparing for a stronger future once the economy has recovered.