Credit scoring models are subject to continual developments to keep pace with advances in analytical predictions of consumer credit behaviour. Changes are introduced which promise more accurate assessments of risk for lenders to base their decisions on. In the recent wake of economic recession and the housing crisis there was a need for improved scoring models which would better predict likely defaults and avoid losses to lenders.
FICO is the most recognized credit score and many are unaware that since 2006 it has had competition from the Vantage score. The latter was devised through the joint workings of Equifax, Experian and TransUnion, to break the monopoly which the Fair Isaacs Corporation had on credit scores.
This means the FICO score has to offer an improved service to retain lenders in the face of competition, thus scoring algorithms have be fine tuned to match lenders expectations. As the Vantage Score is still proving itself, it also needs to be assessed and changed to keep pace with FICO and appeal to lenders, many of whom now use the two systems in conjunction. Nationally creditworthiness fell during the recession and Vantage has now labelled VantageScore 2 as “the new recession era credit scoring model.”
The high level of home foreclosures was not foreseen thus scoring models have needed to be tightened to be more effective to mortgage lenders. The mass rise of strategic defaults caused particular concern amongst lenders as often these were initiated by borrowers who were never perceived as a credit risk. Often they simply walked away from mortgage debt but kept their other credit obligations up to date. Lenders needed a more accurate assessment of risk which changes to both FICO and VantageScore have responded to.
FICO 08 is now being more widely implemented in mortgage lending. It gives less emphasis to one late payment where other credit obligations are up to date but penalizes more for high credit utilization. The VantageScore 2 introduces new changes to the core VantageScore which will better differentiate between the creditworthiness of those with no credit history and those with bad credit history.
Potentially this broadens the data base of borrowers who may qualify for credit who have little history. The new scoring model places much more emphasis on current credit behaviour rather than previous and those applying for new avenues of credit are now given more emphasis.
The key factor which both the FICO and Vantage credit scoring models have concentrated on changing most is their ability to determine default risks. Lenders need scoring models to keep pace with economic developments so that they can cut their risk of defaults by introducing appropriately tighter lending criteria.
If credit scoring does not accurately reflect risk then lenders would be reduced to manual underwriting at huge expense. As long as credit scoring models can accurately predict consumer risk then credit scores will retain their stranglehold over consumers.