VantageScore Whitepaper Examines Relationship Between a Credit Score and Risk Over Time

Examination uncovers how credit scores can be used as continued economic dislocation looms

STAMFORD, Conn.--()--VantageScore Solutions, LLC, developer of the VantageScore credit score model, released today a whitepaper on the VantageScore credit score’s role in understanding consumer credit risk and the need to closely monitor the risk represented by a given credit score in an increasingly volatile economic environment.

VantageScore’s latest whitepaper “The Dynamic Relationship Between a Credit Score and Risk: How to Correctly Interpret a Credit Score During an Economic Downturn,” provides lenders and other users of credit scores transparent details about how the score-to-default risk relationship changes over time, and notes the importance of timely and active credit risk management in order to make proper portfolio adjustments and credit score cut-off recalibrations in response to shifts in the economy.

Some insights from the study are below:

˗ Default levels fluctuate over time because they reflect macroeconomic conditions, such as the unemployment rate, interest rates and home values, all of which can either increase or decrease risk levels.

˗ Data from the 2008-2010 financial crisis provides a useful indication for how risk can shift, where default rates for new originations as well as exiting accounts were 200-250% higher for a given credit score band when compared with a more stable economic timeframe (2017).

˗ Close monitoring of risk results and building in forward-looking expectations and scenarios around how those results may change are necessary in setting, or calibrating, the score cut-offs.

˗ Given the unprecedented impact of the COVID-19 pandemic and the high degree of uncertainty about the shape of the economic recovery and longer-term consumer impacts, the need for closely monitoring and managing risks is even greater.

“Credit scores are often improperly thought of as absolute predictors of whether a borrower will default on a loan,” said Barrett Burns, president and CEO of VantageScore Solutions. “In reality, a credit score is a representation of risk accomplished by rank ordering the scoreable consumer population based on who is least and most likely to default. Inherently, as the overall economy slows, the risk associated with scores will shift in accordance. By understanding this relationship, lenders can make better, safe and sound decisions while protecting consumers from becoming overleveraged.”

For more details from the “The Dynamic Relationship Between a Credit Score and Risk – How to Correctly Interpret a Credit Score During an Economic Downturn,” study, visit: www.VantageScore.com/ScoreRiskWP.

About VantageScore Solutions

Credit scores can impact many aspects of your life, everything from whether you are able to get a loan and how much interest you will have to pay to whether you are able to rent an apartment. At VantageScore, we understand the impact of credit scores and we take that responsibility seriously.

VantageScore Solutions, LLC (www.VantageScore.com) is the independently managed company that owns the intellectual property rights to the VantageScore credit scoring models and is the leader in scoring innovation. The VantageScore 4.0 model scores approximately 40 million consumers who typically are not scored by conventional models – without sacrificing predictiveness.

VantageScore credit scores are used by lenders, landlords, utility companies, telecom companies, and many others to determine creditworthiness. A recent study found that approximately 12.3 billion VantageScore credit scores were used by over 2,500 unique users, including 2,200 financial institutions and 9 of the top 10 largest banks, from July 2018 to June 2019. By using the VantageScore model, these enterprises have access to many more consumers, and in turn, consumers have greater access to mainstream credit.

While there are many credit scoring models in the industry, the “win-win” for VantageScore is its innovative, highly predictive, patent-protected, tri-bureau scoring methodology that provides lenders and consumers with more consistent credit scores across all three national credit reporting companies.

Contacts

Jeff Richardson
VantageScore Solutions
203-363-2170

 

Release Summary

VantageScore study details score-to-default risk relationship changes over time and the need for active credit risk management in a volatile economy.

Contacts

Jeff Richardson
VantageScore Solutions
203-363-2170