A More Inclusive Credit Scoring Model
Economists refer to the U.S. recovery as ‘K-shaped’, meaning that one segment of the population is prospering while another is struggling. VantageScore® Solutions is hoping to positively impact those getting left behind by increasing the number of scoreable consumers and providing a fair and accurate representation of credit risks. As a result, millions of “conventionally unscoreable” consumers will get a more equitable shot at gaining access to mainstream credit products.
In 2006, the three national credit reporting companies (including Equifax) created the first VantageScore model, which resulted in a highly accurate, more inclusive scoring model that enabled more consumers to be scored and gain access to mainstream credit. During our July 20 Market Pulse podcast, Dr. Emre Sahingur, SVP of predictive analytics research and product management at VantageScore Solutions, discussed the opportunity that exists within our industry.
“Based on research we’ve recently compiled, we found there were about 48 million consumers who are not receiving a score through legacy models due to their restrictive minimum scoreability criteria. And we can estimate that VantageScore can provide an accurate credit score for about 37 million of these consumers. In other words, we can reach about 96% of adults in the United States and provide a reliable and accurate score for them,” Sahingur said.
Understanding the Unscoreable Population
VantageScore Solutions aimed to more thoroughly understand the unscoreable population. Dr. Sahingur and his team looked at key socioeconomic indicators, such as income levels, education, home ownership and access to financial services in the communities consumers live in. They also looked at how race correlates with these different factors. A key goal of the research was to identify consumer segments that could benefit most from a more inclusive credit scoring model.
Listen now to the full podcast episode, “Financial Inclusion’s Role in the Economic Recovery.”
Breaking the Cycle
“We see that out of the 37 million consumers that are newly scoreable through VantageScore models, there's about 10.7 million who are either African-American or Hispanic. And out of that 11 million, we see that about three million consumers have scores of 620 and above. That means they could be credit-worthy borrowers for the right type of product for the right type of underwriting,” Sahingur explained. “Our research shows that consumers who don't have a credit score are left out of the financial system altogether or receive unfavorable terms.”
Sahingur went on to explain that it’s critical to break this negative cycle of financial exclusion. “A lack of a credit score results in either alternative sources of funding or financing like a payday loan or unfavorable terms, such as high cost of borrowing or significant bill over limits. And that reduces the consumer's ability to meet on their payment obligations and eventually default potentially. As a result, the consumer is pushed further out of the financial system.”
Bringing Economic Benefits to Us All
Director of consumer credit analytics at Moody's Analytics, was also a featured guest on this episode, and he spoke about the importance of credit inclusion to boost the economy.
“There's only a couple of channels that you have to really increase consumer spending. You can have higher wages, lower taxes, and access to credit is another channel to increase consumer spending. So, I hope it's going to be helpful here as we come out of the pandemic,” Fieldhouse said.
“And the last channel that is important for economic growth is if some of these individuals can get access to credit, establish themselves, and potentially start a business a year earlier. That will improve economic productivity and have additional multipliers into the future. So, I think it's great work that we're seeing here from VantageScore. And, financial inclusion will bring economic benefits to us all,” he said.
Listen to more episodes of the Market Pulse podcast.