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Avoid alternative facts about alternative data

Dear Colleague: 

There’s quite a lot of misinformation and misunderstanding surrounding “alternative data” with respect to credit scoring and consumer credit access. So much so, that the Consumer Financial Protection Bureau (CFPB) recently issued an open request for information on the impact of such data on “credit invisibles”—consumers whose credit histories are insufficient to obtain credit scores when using conventional credit scoring models.

In support of our goal of accurately scoring as many consumers as possible, VantageScore Solutions has embraced “alternative data” from the very beginning, and I feel qualified to offer some thoughts on the matter.

First of all, what is “alternative data?” Most definitions characterize alternative data as data other than the debt-payment records lenders report to the national credit reporting companies (CRCs). Other definitions consider alternative data to be any data that resides outside of a consumer’s credit file. 

For the purposes of this article, let’s use the former definition and level-set a number of distinctions. 

Rent, cellphone, and utility payments are good examples of alternative payment data under our definition. What’s more, they are highly predictive, and credit scores generated using alternative data are highly predictive. As revealed in a pair of Experian studies, alternative data can have a significant positive impact on consumer credit scores and access to credit. The first study, Let There Be Light  (2015), examined a sample of Experian credit files that contained positive utility-payment data, while the second, Let the Light Shine Down (2016), looked at the score impacts of positive-payment data on customers at a large Northeastern energy utility. The studies found that a vast majority of consumers (97 percent in the 2015 paper and 96 percent in the 2016 study) saw increases in their VantageScore 3.0 credit scores thanks to positive utility-payment data.

In addition, substantial numbers of consumers (nine percent in the 2015 study and seven percent in the 2016 edition) increased their credit-file “thickness”—migrating from no-hit (zero trades on their credit files) to thin-file (four trades or fewer), or from thin-file to thick-file (five or more trades) when rent- and utility-payment data were taken into account. Greater file thickness allows consumers broader access to credit, and potentially better borrowing terms.

VantageScore 3.0, like all preceding VantageScore models, considers positive-payment activity, such as on-time payments of rent, phone and utility bills, whenever that data is available in a consumer’s credit file. (VantageScore models do not pull in this data, or any other data, that resides outside of consumer credit files.) VantageScore was the first to include this data in a generic credit scoring model, and our established rival eventually followed suit in its later models. 

We believe our models’ consideration of this more comprehensive data corrects a historic imbalance, under which consumer credit scores could be penalized for negative utility-payment behavior but received no credit for positive rent or utility payments: Years, or even decades, of steady, timely payments yielded no benefit, but if an unpaid rent or utility payment were sent to collections, that event would appear as a derogatory entry on the consumer credit file, with a corresponding reduction in credit score. 

So how much of this data is currently impacting consumers? Admittedly, not much.

Relatively few landlords and utilities currently report payment data to the national CRCs, but we applaud forward-thinking organizations such as the Policy and Economic Research Council (PERC), which advocate for more widespread reporting of these data. We support efforts to report a greater amount of that alternative data to the national CRCs, and believe doing so will expand credit access for many deserving U.S. consumers. 

VantageScore has been committed from the start to the use of alternative data found within consumers’ credit files, which is subject to thorough data accountability standards under the federal Fair Credit Reporting Act (FCRA). Because our models accept this alternative data, some refer to them as “alternative models.” Others refer to VantageScore models as “alternative models” in the context of being an “alternative” to another major brand. We prefer to think of VantageScore models as competitive models that incorporate comprehensive, regulated, FCRA-compliant credit bureau data.

All the best,

 

Barrett Burns

VantageScore makes a splash at SFIG Vegas 2017

VantageScore Solutions once again loomed large at SFIG Vegas 2017, this year’s edition of the world’s largest capital markets conference. Sponsored by the Structured Finance Industry Group, the event brings together professionals from a variety of businesses and disciplines to focus on trends and best practices in the process of loan securitization.

VantageScore used the event to spotlight the VantageScore Default Risk Index (DRI), a tool designed to highlight the effective use of credit scores to evaluate default risk in groups of consumer loans, such as those that might be bundled into mortgage-backed securities (MBS) or other asset-backed securities (ABS).

To help familiarize conference attendees with the DRI, VantageScore distributed copies of a guest editorial in Asset Securitization Report by VantageScore SVP Mike Trapanese. The article, “Industry’s Flawed Reliance on Credit Scores Leads to Confusion,” addressed a flaw in the way many securitization-industry professionals use credit scores to measure risk in pools of consumer loans.

VantageScore Solutions CEO Barrett Burns speaks at SFIG Vegas 2017VantageScore CEO Barrett Burns (center) addresses SFIG’s advocacy agenda for 2017.

VantageScore Solutions CEO Barrett Burns, a member of the SFIG Executive Committee, also took part in a group discussion on the organization’s advocacy agenda for 2017, which touched on topics including anticipated regulatory changes under the Trump administration and the future role of the Consumer Financial Protection Bureau.

VantageScore also shared with SFIG its longstanding affiliation with the National Association of Hispanic Real Estate Professionals (NAHREP) by sponsoring a performance of the stirring one-man play “53 Million & One,” written and performed by NAHREP Foundation Chair Gerardo “Jerry” Ascencio. Via projected video, sound effects, stage props and costume changes—not to mention Ascencio’s professional chops as a singer and mariachi guitarist—the show vividly evoked the American Dream and the central role homeownership plays in it.

NAHREP Foundation Chair Jerry Ascencio performs an autobiographical play at SFIG Vegas 2017NAHREP Foundation Chair Gerardo “Jerry” Ascencio brings to life the story of his family’s journey to U.S. citizenship, homeownership, and business success.

Amid all the educational presentations and panels, there was still time for some socializing, and a highlight was the Sunday-night welcoming reception sponsored by VantageScore. The party has become the company’s signature event at the conference, and this year attracted more than 600 conference attendees. Partygoers stopped by The Jewel nightclub at the Aria hotel to mingle, move to the sounds of a top Las Vegas DJ, and partake of food and drink, including VantageScore’s trademark cocktail, the Vantini.

Partygoers at the SFIG Vegas 2017 welcoming reception sponsored by VantageScore SolutionsSFIG Vegas 2017 attendees mingle, munch and move at the welcoming reception sponsored by VantageScore Solutions.

VantageScore (and the Vantini) will return for SFIG Vegas 2018.

VantageScore Default Risk Index receives an update and media attention

VantageScore Solutions recently completed the first quarterly update to the VantageScore Default Risk Index (DRI), an interactive website developed with TransUnion to track quarterly originations risk in four consumer-lending categories—mortgage, bankcard, auto and student loans.

The update coincided with the publication of an op-ed about the DRI that appeared in the Asset-Securitization Report (ASR). 

Headlined “Industry’s Flawed Reliance on Credit Scores Leads to Confusion” and written by VantageScore EVP Mike Trapanese, the ASR article spotlights the DRI’s strategic goal of exposing a major flaw in the way many securitization-industry professionals measure risk in pools of consumer loans: The mathematical invalidity of the common practice of using average- or weighted-average credit scores to evaluate risk in batches of loans. The DRI instead provides an accurate representation of portfolio risk by converting credit scores to their corresponding probability of default (PD) values—a superior methodology that is thoroughly explained at the DRI site with supporting videos and a detailed white paper.

The best way to experience the update to the DRI data series is by visiting DefaultRiskIndex.com and experimenting with its interactive tables and charts. The update is also summarized in the table below and in the following observations, which appear in commentary boxes on the site:

Default Risk Index: The moderation in risk taking that began in 2014 largely extended into the third quarter of 2016. After an expansion in risk taking in early 2015, 2016 saw continued contraction. On average, only bankcard lenders have risk appetites comparable to those of late 2013, at the start of the DRI data series. 

Quarterly Snapshot: Mortgage, auto, and student lenders took marginally less risk in the third quarter. Card lenders, however, moved in the opposite direction, with a small increase in risk profile.

Total Originations: Origination volumes increased in all four sectors, with the strongest growth driven by the seasonal uptick in student lending. 

Industry

Total Originations

Probability of Default (Weighted Avg.)

Default Risk Index

DRI vs. Last Quarter

DRI vs. Same Quarter Last Year

Mortgage

$505.2 B

0.96%

82.5

-3.4%

-4.8%

Bankcard

$97.0 B

2.82%

100.5

2.0%

2.8%

Auto

$163.4 B

4.01%

91.1

-5.4%

-5.2%

Student

$48.4 B

15.24%

73.7

-21.7%

-2.9%

The Default Risk Index exemplifies VantageScore’s commitment to innovation, transparency and thought leadership. The Index is winning attention in the important securitization and asset-ratings industries for which it was designed. DefaultRiskIndex.com is well worth exploring.

Did You Know… the truth about bankruptcy on credit reports?

It’s formally known as legal protection from your creditors, but everyone just calls it “bankruptcy.” If you’re overwhelmed with debt and there’s no chance you’ll ever be able to pay it off, then bankruptcy is an option you’ll likely explore, although it should probably be your last resort. Bankruptcy filings will find their way to your credit reports, and they can stick around for a very long time.

The Fair Credit Reporting Act (FCRA) allows the three national credit reporting companies (CRCs—Equifax, Experian and TransUnion) to preserve records of bankruptcy for up to 10 years. And, as you no doubt assume, bankruptcies are not positive credit report entries. In fact, your credit scores can never be as high as they could be so long as a bankruptcy filing is listed on your credit report.

The decision to file for bankruptcy isn’t an easy one. In addition to the lasting negative impact on your credit scores, bankruptcy is an expensive process. Balancing its high costs against the opportunity to wipe the slate clean and become debt-free is a challenge one million U.S. consumers must deal with every year.

The good news about bankruptcy, besides the fact that it can render an individual overwhelmed by unpaid bills essentially debt-free, is that as time passes after the bankruptcy filing (or, as credit-scoring pros say, as the record ages), its negative influence on your credit scores will diminish.    

That means that even if you do nothing to rebuild your credit in the years following the filing, your scores will improve organically over time, assuming you’re not re-polluting your credit reports with new derogatory information. You can, and should, take more proactive action to improve your score as well; the steps are much the same as for newcomers to the credit world, seeking to obtain a credit score for the first time.

Note, however, that even as your credit scores begin to increase, you may have difficulty obtaining credit approvals, especially in the first few years following a bankruptcy filing.

Debts eliminated by bankruptcy cannot remain on credit reports longer than seven years from the date the individual accounts began going into default. And, if you have third-party collections on your credit reports, each must be removed within seven years from the date the original account went into default. That means the record of your bankruptcy filing will likely persist on your credit reports longer than the defaulted debts eliminated by your bankruptcy. 

Some lenders make a policy of denying credit to any applicant with a bankruptcy on his or her credit report—even one with a credit score that exceeds the lender’s minimum requirements. And some lenders will never lend you another dime if you’ve discharged a debt with them in a bankruptcy, regardless of how much time passes, or how high your credit scores may climb.

It’s also important to keep in mind that not all debts can be erased via bankruptcy. In legal lingo, these debts are not statutorily dischargeable. These include tax liens and government-guaranteed student loans. Your bankruptcy attorney should explain how this limitation might apply to you and set realistic expectations.

This brings us back to that other downside to filing bankruptcy: It can be expensive. You’ll want to hire an experienced bankruptcy attorney to help with the filing. Their fees can be well over $1,000. Various additional fees could total another $400. And no, those expenses cannot be discharged in the course of the bankruptcy. These are steep expenses to anyone who’s having difficulty paying their bills. Nevertheless, if it allows you to eliminate most or all of your debt and get a fresh start, the costs may be worth it.

Five Questions with Jason Steele, credit card journalist and blogger

Jason Steele

Jason Steele is a journalist who writes about credit cards, award travel, and other areas of personal finance. A leading expert in the credit card industry, Jason’s work has been featured at Yahoo! Finance, MSN Money, Business Insider, and other news outlets.

Jason’s expertise is also well known to travel-rewards enthusiasts for posts on airline rewards and family travel at The Points Guy and other outlets. Knowledge of the intricacies of earning and spending rewards points and miles have allowed Jason and his family to travel the world using awards miles that would otherwise have cost hundreds of thousands of dollars. Jason took time between treks to field five questions from The Score.

You are a prolific blogger about credit cards. At some point do you find it difficult to find new topics to cover?

It can be a struggle sometimes, and repeatedly writing about the same subjects is not the most glamorous part of my job. On the other hand, this is a very dynamic industry and new products are constantly being introduced. Also, I work for some terrific outlets that sometimes do the “heavy lifting” for me by assigning interesting topics.

Over the past few years, consumers have been provided free credit scores on an unprecedented level. What impact are you seeing as a result?

When I started covering the industry about 10 years ago, credit scores were largely a mystery to the general public, and now “credit score” is kind of a household term. Not too long ago, you had to pay a company to provide you with a credit score as part of a credit monitoring service. These services were only used by a small fraction of the general public, and most people ignored their scores. But with ready access to scores today, there’s no excuse not to know. By knowing their scores, the public can be more active in managing their credit and becoming better borrowers, which benefits both lenders and the overall economy.  

You are one of the early attendees and planners of FinCon, which is now a major event for financial bloggers and journalists. How did FinCon get started and why did it grow so fast?

Phillip “PT” Taylor started FinCon in 2011, and that year it was a modest affair in a suburban Chicago hotel with just about 200 bloggers. But in 2012, he held it in downtown Denver, which also happens to be my hometown. That year we all had an amazing time both during the conference and at events around town afterwards. He’s followed it up by picking great venues in the heart of fun cities, and making sure everything runs smoothly. It’s now grown to over a thousand attendees.

Another key to its success is the fact that he really involves the community in planning the conference so we feel like it’s “our” event. As much as we all interact all year long online and in social media, there’s simply no substitute for gathering everyone together and having a good time for a few days. 

Over the years, I’ve tried to do my part by starting a FinCon local meetup event here in Denver, organizing the freelancer’s marketplace at FinCon, and helping to produce events at the conference just for those who write about credit cards and consumer credit.

How do you advise consumers who want to earn credit card points and seek discounts on merchandise but who also should be careful about opening new credit cards and/or becoming overextended?

Whether you are a casual user of reward cards or a hardcore points and miles fanatic, the cardinal rule always is to avoid interest charges by paying your monthly statement balances in full and on-time. Only about half of American credit card users do this. If you don’t, you should be focused on paying off your debt at the lowest interest rate available to you, not earning rewards. 

The other important rule is to never have more credit cards than you can responsibly manage. For some people, that number could be one or even zero, while others can manage numerous accounts. Credit cards are a powerful tool, and like any tool, they can be incredibly useful or remarkably dangerous, depending on how they are used. 

You are participating in a panel of financial bloggers next May at SourceMedia’s Consumer Credit Summit at Card Forum and Expo 2017. The panel is tasked with discussing how consumers are engaging with card issuers online. Without giving away too much, what is your view on that topic?

I think we are at a crossroads with card issuers beginning to show some real innovation in how they interact with their customers. Every issuer has long provided online statements and email/text alerts, or a basic mobile app. But soon we will see card issuers adopting the latest FinTech to benefit their customers. 

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