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The FICO credit score was introduced many years ago and touted as the end-all for determining a prospective borrower’s creditworthiness. The better the score, the more likely the borrower would repay the debt. The lower the score, look out, higher potential for default. Simple, right?
No more! Today, we’re told that maybe this revolutionary predictor may be outdated and in need of a major overhaul. Its process for the determination of the score may be exclusionary, limiting access to those with non-traditional or limited credit histories. Maybe…
Along comes VantageScore, a new credit scoring model owned and operated by the big three credit repositories, Equifax, TransUnion, and Experian.
They say, “Use our score, it is much more inclusive. In doing so, we’ll open the doors to homeownership to many more underserved consumers. It’s only fair.”
But is it? The industry has fared quite well under FICO. It has become a benchmark. Consumers and lenders have become comfortable with its results and found that in most cases the score is quite indicative of the consumer’s creditworthiness.
Let’s face it, nothing is perfect. Any scoring will have some exceptions, But, for the most part, FICO has been pretty much spot on.
In fact, in the instances of discrepancies, it is through the fault of the debt reporter or the repository that creates the problem. The score only processes what is provided. It cannot validate its accuracy.
The fear with the new VantageScore lies in its utilization of a ‘skinny’ credit profile. FICO and Vantage are based on the same consumer credit data obtained from the same three credit bureaus.
One major difference is that VantageScore will accept stale and sparse files, requiring as little as one month of credit history. Is that enough?
- How would these consumers be scored?
- Would the limited profile result in a lower score, harming the consumer, while offering them little more, if any, opportunities for financing?
- What could be the effects of qualifying credit limited consumers for more loans? This is presently unchartered waters.
- Are lenders, and the industry, ready to sail those seas in the quest for new mortgage opportunities? Who knows what may lie ahead.
The real challenge lies in finding ways to realistically qualify more people for more financing to buy homes while maintaining some level of quality and risk management. Producing more loans that ultimately end up in default is not a good long-term strategy.
Exploring more ways to expand the credit box to include more consumers is a worthwhile endeavor. One that needs to be pursued, but with caution.
It should be done with one eye on the potential to increase homeownership opportunities and expand the business, preserve loan quality, the integrity of sound lending principles. The other eye should be on continued loan quality, minimizing lender, and consumer risks.
It may be time to embark on a new mission. But, we need to do so prepared with the facts and carefully plan the route. Tread carefully along the new path.
