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No single credit scoring model represents the marketplace

Dear Colleague:

As a reader of this newsletter, you obviously take an active interest in the world of credit scoring. So you are probably aware that the U.S. Consumer Financial Protection Bureau (CFPB) recently announced settlement orders with two of the national credit reporting companies, Equifax and TransUnion. You may also have noticed that one of those settlements mentioned VantageScore.

We weren’t involved in that process or those settlements, so it wouldn’t be appropriate for us to comment on their findings, but here’s what we know to be true: There is no one credit scoring model that singularly represents the consumer lending marketplace. In addition to all three VantageScore models and the dozens of FICO models that are in use today, many lenders rely on their own proprietary models to grant or manage credit.

In light of the reality that no single credit model is the yardstick used by all, or even most, consumer lenders, consumers should understand that no score they buy or obtain from a free-score web service is guaranteed to exactly match scores from the model or models a lender may consider when making a lending decision. Nevertheless, consumers can benefit greatly by using scores from validated models such as VantageScore’s to monitor their creditworthiness. If consumers adopt habits that improve the score they obtain from any valid model, that should also lead to an improvement in the scores generated by the dozens of other commercial models also used by lenders. The three-digit scores produced by those models are unlikely to align perfectly, but they’ll track directionally, and serve as valuable tools for documenting and reinforcing good credit behaviors.

In light of all that, we were pleased to read The Truth about Credit Scores,” an incisive LinkedIn post by Michael Turner, Ph.D., the CEO of the Policy and Economic Research Council (PERC), which reiterated this message:

“[A] potential unintended consequence from this CFPB enforcement action is that it misleads people into thinking that there is just one score used by lenders. In reality, there are many different credit scores used by lenders, though among credit bureau scores FICO enjoys a dominant position. As a result, even if nationwide [credit reporting companies] were to provide consumers with just their FICO 9 or VantageScore 3.0, a lender will in all likelihood be using their own proprietary scoring model that may only use the FICO or VantageScore scores as inputs.”

Dr. Turner’s analysis is spot-on, and inspired us to invite him to be our guest for a Five Questions profile. Like VantageScore, he and his colleagues at PERC are committed to expanding consumer understanding of credit and credit scoring and pursuing innovations that extend mainstream credit to all qualified borrowers who want it. 

All the best to you in 2017,

 

Barrett Burns

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