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A bigger slice—and a bigger pie

Dear Colleague:

I’m looking forward to Thanksgiving as much as anyone, but lately I’ve been thinking about pieces of pie that have nothing to do with Grandma’s flaky crust. No, the 2015-16 market-adoption figures we released a few weeks ago have me thinking about slices of the credit scoring market.

Indeed, the fact that more than 2,400 companies and financial institutions now use VantageScore indicates that we’re capturing a larger slice of the credit-scoring pie. We’ve made important inroads against our entrenched competitor, and we’re proud of that.

One of the important take-aways is that although some lenders are clearly voting with their feet by choosing VantageScore, some of our explosive growth in usage is tied to expansion in the marketplace for credit scores. The pie itself is getting bigger – much bigger.

Usage of credit scores in traditional loan-approval processes has grown, while innovative lenders and other companies continue to find additional uses for them, including:

Customer acquisition/marketing. Credit scores are used to segment consumers to identify prospects for specific loan offers and other financial-services products.

Tenant screening. According to the National Multifamily Housing Council, 35 percent of Americans rent their homes, and a growing number of landlords are using credit scores as part of their screening processes, including frequently relying on scores to determine the amount of security deposits they charge. (Determining whether or not to rent someone an apartment is a kind of credit decision, after all.)

As an input to a custom model. Many lenders use VantageScore scores as one of several “inputs” into custom-built scoring models they have developed to automate their lending processes.

Account management. Many lenders, particularly in the bankcard arena, regularly check customers’ credit scores. If lenders observe a severe drop in a consumer’s credit score, they may reduce spending limits or take other loss-prevention measures. Conversely, increases in consumers’ credit scores can lead to credit line increases as well.

Evaluating securitized loan portfolios. The increasing availability of loan-level data, including monitoring of credit scores of borrowers whose consumer loans make up portfolios of asset-backed securities, helps investors and securities issuers alike gauge changes in the risk profiles of such securities.

Loss reduction. Some lenders may use credit scores to prioritize strategies for preventing loss (for example, by issuing reminders when customers make late payments) and for recovering losses through the collections process.

Utilities. Utility companies will frequently use credit scores to determine if a deposit is required and, if so, how much.

In addition, we continue to see impressive growth in the number of websites that offer VantageScore credit scores as part of free memberships or subscriptions that also provide personal-finance tips and information for improving credit health. (Many of these sites advertise credit cards and other products tailored to users’ credit scores.) Many credit issuers are also providing customers with free credit scores.

A bigger pie and a larger slice of it are things we’re very thankful for this season. We’re grateful as well to all who support us and who read this newsletter. Have a great Thanksgiving.

All the best,

Barrett Burns

Study:
Many ‘unscoreables’ are creditworthy, well-qualified for mortgages

The latest VantageScore research study, Exclusionary Credit Score Modeling Limits Access to Credit for Millions of Consumers…Even Perhaps Your Next Door Neighbor, lays to rest any suggestion that the VantageScore model is less safe or sound than conventional models because it scores 30-35 million more consumers than they do. To the contrary, as the title suggests, models that do not score this population unfairly exclude them from accessing mainstream credit.

The study sought a more detailed financial portrait of the “expanded population” that can be scored by VantageScore but not by competing scoring models, including the roughly 7.6 million consumers whose scores of 620 or higher indicate a high degree of creditworthiness.

To that end, VantageScore scientists examined five million anonymized credit files which had been supplemented with demographic and economic data from Experian. This enabled a comparison of expanded-population consumers to their traditionally scoreable counterparts on a variety of financial characteristics, including income, employment, debt, and the general ability to afford mortgages in their geographic regions.

Highlights include:

  • Individuals in the expanded population who scored above 620 using the VantageScore 3.0 model exhibited profiles of sufficient quality to justify mortgage loans on par with those of conventionally scoreable consumers. Approximately 2.3 to 2.5 million consumers—a majority of the 3.4 million consumers who were categorized as potentially eligible for mortgages—demonstrated sufficient income to support a mortgage in their geographic areas.

  • When a credit score is the predominant information used to assess risk, as is often the case in bankcard lending, consumers without a conventional credit score are often assessed as high-risk. This occurs despite the possibility that they are simply conservative users of credit with strong financial foundations.

  • Seventy-six percent of consumers with scores above 620 at the beginning of the two-year period maintained scores above 620 through the end of that period. Seven percent of consumers with scores below 620 at the outset raised their scores above 620 by the end of the period.

The study confirmed that many financially stable, creditworthy individuals are excluded from access to mainstream credit under the prevailing underwriting infrastructure for conventional credit scores. The study underscores the limitations of reliance on a conventional brand of credit scoring model within underwriting systems and highlights significant opportunities available to lenders that have the flexibility to choose among competing credit scoring models, including the VantageScore 3.0 model, for use in their automated underwriting systems.

Download the white paper at www.VantageScore.com/exclusionary. An infographic highlighting findings of the study is available at www.vantagescore.com/exclusionary_infographic.

Equifax study of mortgage-backed securities applies VantageScore 3.0

October marks the third anniversary of Fannie Mae’s Connecticut Avenue Securities (CAS) program, which allows institutional fund managers to invest along with Fannie Mae in securities backed by Fannie Mae-approved single-family mortgages. Equifax recently completed a study using its Credit Risk Insight for CAS tool to provide a detailed risk analysis of five of the securities that have been issued under the CAS program since its inception.

The Credit Risk Insight tool allows investors to compare and track CAS securities using anonymized credit file data matched to each borrower and co-signer of the loans that constitute the respective security.

In addition, Credit Risk Insight for CAS enables monthly comparison and segmentation of the component loans via VantageScore 3.0 credit scores, as well as by specific risk indicators such as length of credit history, amount of revolving-credit utilization, and the presence of any delinquent accounts.

The results of the study appear in an infographic available for download here.

Did You Know…Your credit score is still the number one interest rate factor, even in the face of a Fed rate hike?

There has been much talk of late about whether the Federal Reserve Board, a.k.a. “the Fed,” will raise interest rates before the end of the year, as it did last year.

The Federal Funds Rate, known less formally as the Fed Funds Rate, is the interest rate at which banks and other depository institutions lend money to each other. For all practical purposes, it’s the rate financial institutions pay to borrow money, which they in turn lend to consumers. In December 2015, the Fed raised the Fed Funds Rate from a range of zero to .25 percent to a range of .25 percent to .50 percent, which is where it still stands as of today.

A potential increase in banks’ cost of funds is fueling speculation that the consumer interest rates will follow suit, and indeed they might. But having said that, there is a number that plays a much larger role than the Fed Funds Rate in determining how much you pay in interest. And unlike the Fed Funds Rate, it’s even a number you have some control over: your credit score.

The difference in the Fed Funds Rate between last year and this year can be measured in what’s called “basis points.” A basis point is 1/100th of 1 percent, which means it represents a very small difference in the cost a bank pays to borrow money before lending it. Even if a bank decides to pass along the entire amount of an interest rate hike to their borrowers, the increase in the rate you pay would be much less than 1 percent.

By contrast, the difference in rates paid by people with low credit scores compared with those paid by high-scoring individuals is much, much higher than a few basis points.

The starkest comparison concerns auto-loan rates. A borrower with really good credit scores can pay almost zero percent interest for certain makes and models of cars. Conversely, a borrower whose score is just good enough to get a loan approval might pay a rate of more than 20 percent on the same car loan. As explained at the educational website CreditScoreQuiz.org, that could mean an increase of more than $5,000 in interest payments on a $20,000, 60-month auto loan.

Increases in mortgage interest rates are less stark, but their consequences in dollars and cents can nonetheless be eye-popping. For example, a borrower with great credit scores can get a 30-year fixed-rate mortgage loan for about 3.3 percent. On a $250,000 mortgage, the monthly payment would be around $1,096. Another borrower, whose credit is just good enough to get an approval for the same loan amount, would be charged an interest rate close to 5 percent. That translates to a monthly payment of about $1,325 for the same loan amount – or a total of more than $80,000 in additional interest over the life of the mortgage loan.

So if you’re concerned about avoiding higher interest rates, you’re better off not worrying about the Fed and instead focusing on improving your credit score. There are some great tips for doing so at YourVantageScore.com.

Five Questions with James Zhang, head of personal loans, NerdWallet

As head of the Consumer Credit and Debt team at the San Francisco-based FinTech company NerdWallet, James Zhang leads NerdWallet’s efforts to fight online predatory lending and to connect consumers with alternative resources. Previously, James was a private equity associate at the Riverside Company where he invested in business services, consumer retail, healthcare, and technology companies. He began his career as an analyst with the Firm Strategy and Corporate M&A team at Morgan Stanley. James grew up in our home state of Connecticut, and we’re grateful he could find time for a profile in The Score.

With all of the controversy surrounding payday lending, how do you think it’s possible that it still exists? And if it’s here to stay, how do you think it can be fixed to meet more consumer needs?

It is worth taking a step back to look at the overall market for lending to the low-credit or no-credit demographic. On the demand side, there are millions of consumers in this demographic who will need loans every year. The reasons that a consumer might need a loan may vary (emergency expense, covering a purchase, income shortfall, etc.), but it is safe to assume that the overall demand isn’t going anywhere.

On the supply side, one may expect that the banks, credit unions, and community banks should be able to lend to this demographic. However, these deposit-taking institutions have been placed under increasing regulation that has disincentivized higher-risk lending—namely to consumers with poor or no credit history—which led to a decline in the supply of loans despite growing consumer demand. 

Payday lenders have stepped into this market opportunity. Because payday lenders do not take deposits, they have not been subject to the national bank regulators to which the banks are subject. Instead, the payday lenders are regulated at the state level, and states vary in how strictly they regulate usury. For example, the state of Georgia caps APRs at 36 percent, which means no payday lenders operate in the state. Next door in the state of Alabama, there are no caps on APRs, and that has led to a proliferation of payday lenders, with thousands of them in operation there.

In terms of what can be done, government should work to streamline regulations so that banks, payday lenders, and new innovators are competing on equal footing while still protecting consumers from harm. Nonprofits are also important players in such efforts, from providing financial education to even providing loans themselves.

In the private sector, there are many companies exploring ways to use technology to reduce costs and enable better loans to consumers. Much more can be done, and NerdWallet looks forward to partnering with such consumer-first organizations to provide safe resources to consumers.

Tell us about the latest resource on NerdWallet that allows consumers to find alternatives to payday loans.

NerdWallet’s mission is to provide clarity for all of life’s financial decisions, and payday loans are ground zero for people in true financial distress. In an effort to educate consumers about the dangers of payday loans, and to steer them in the direction of sensible alternatives, NerdWallet set out to build a free online database of alternatives to payday loans.

Consumers can come to the site and type in their zip codes to find local financial assistance for emergencies, utilities, healthcare, and more. These resources include a variety of products and services offered by nonprofit organizations that meet the consumers’ urgent need without trapping them in a debt cycle. The database initially launched in April 2016 with local alternatives in California and Texas—two states with the highest number of payday loan storefronts in the country. The work that led up to our launch was profiled shortly afterward in a New York Times feature. Today, the database has grown to include 150 resources in 45 states.

Guided by our consumer-first mission, we will continue to build experiences that help real people who have real problems. Most nonprofits don’t have the marketing resources to reach wide consumer audiences. A major goal of our work is to bridge the large gap that exists between consumers in need and organizations that can help.

Before heading into a major loan—whether it be a student loan, mortgage, etc.—what are some things consumers should prepare for in order to maintain their financial stability in the long haul?

The best thing you can do before making any large financial decision is to research all of your options. Reading everything and intimately understanding the terms you’re about to agree to are crucial to ensuring you’ll be in a good financial place in the future. Be sure you fully understand the different APR ranges offered, the range of credit scores expected, and other important factors before moving forward. Most importantly, understand the amount of the monthly payment you’re about to take on, and how long you’ll be required to pay it, and make sure you work that into your budget so you’re not scrambling to make ends meet.

A number of providers now also offer additional benefits, like a discount for setting up autopay or assistance if you lose your job. Do your homework to see what other benefits, if any, are offered by the provider of your loan. You can’t predict the future, so the safety and security that comes with a benefit like job-loss security is priceless. When in doubt, always ask.

What are some insights you’ve gained from growing up with immigrant parents that have helped shape the path you’ve chosen for yourself?

As cliché as they sound, the value of hard work and not taking anything for granted. Paying it forward is also important to me, as I wouldn’t be here without the support of many folks along the way.

What do NerdWallet’s user data and your own experiences with customers tell you consumers want or need to know about their credit scores? Have you uncovered any points of confusion or curiosity?

Well, a large number of consumers don’t actually know their own credit scores, let alone what’s inside their credit reports and which of those factors are affecting their scores. NerdWallet offers free VantageScore credit scores to consumers as well as information about their credit reports, both of which are powerful tools for consumers to understand their creditworthiness and their ability to qualify for a number of financial products.

We often find that consumers need a refresher on the factors that influence their score so we’ve developed NerdWallet content specifically around building credit. Our experts break down the essentials, payment history, credit utilization (another tricky topic), age of credit history, applications, and types of credit, in a consumer-friendly way, making it easy to understand.

We also often see consumers mistaking their credit scores for indicators of all-around financial well-being, which they are not. Since credit scores don’t consider your income, savings, or job security, they shouldn’t be considered a full measure of financial health. Your credit score is there to measure the likelihood that you will repay a future loan or credit card balance by evaluating how well you’ve handled your debts in the past.

Tenth Anniversary Top 10:
Score improvement advice

2016 marks the 10th anniversary of the founding of VantageScore Solutions, LLC. To commemorate that milestone, each 2016 issue of The Score newsletter will include a bonus “Top 10” article. This month, we offer a look at the 10 most popular entries featuring advice on how to improve credit scores.

Rank

Page


10

What impacts/improves credit scores


9

Five Questions with consumer-credit expert Gerri Detweiler


8

A Roadmap to Better Credit Scores


7

Did You Know… How to avoid hurting your credit score this holiday?


6

How do I make my credit score better?


5

Valuable credit tips for mortgage seekers


4

Assume the Role of Managing Your Credit Prudently and Watch Your Credit Score Improve


3

Myths: What impacts credit scores?


2

How to use your credit card to improve your credit score


1

Understand Your Score: How to improve your score



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