According to a recent study by VantageScore Solutions the company behind the VantageScore credit scoring model, its latest version, VantageScore 2.0., remained highly predictive when tested during a period of extreme economic volatility.
The results of VantageScore Solutions’ examination confirm VantageScore 2.0’s superior risk management capabilities in regions where the duel stress of high home price depreciation and high unemployment have significantly influenced default rates. Additionally, the study found that VantageScore 2.0 performed particularly well in the real estate loan category.
The VantageScore model was built and is validated using a massive pool of anonymous consumer credit files from a blended timeframe that includes a period of unprecedented credit availability prior to the recession, and the extreme volatility that ensued. By using such a large sample of data from multiple timeframes, the VantageScore model was able to capture market conditions and have enough evidence to weight behaviors such that the algorithm was predictive in the extreme conditions during the last recession.
“The ability for credit score models to perform equally as well and as advertised in periods of severe economic distress is critical,” said Barrett Burns, president and CEO of VantageScore Solutions. “From a consumer’s perspective, they need to be matched with the right type of credit product and from a lender’s perspective, they need assurances that their portfolios will not suffer because their credit scoring model broke down due to weakening economic forces.”
The VantageScore credit scoring model is used by numerous lenders, making billions of decisions annually, including four of the top five financial institutions, the top five credit card issuers, two of the top five auto lenders, and one of the country’s largest mortgage lenders. Recent media reports disclosed that banking giant Chase adopted VantageScore in January of 2011. Secondary market participants including Fitch and S&P also rate securitized loan package issues using the VantageScore model.
About the Study:
VantageScore Solutions’ study examined 10 million consumers that were randomly selected from a national consumer credit database. Consumers were assigned to one of four segments defined by their respective state’s unemployment rate and rate of home price depreciation. Home price depreciation rates for each state were determined by comparing current average home value with the peak average home value in the fourth quarter of 2006. The unemployment rate was determined by identifying the maximum unemployment rate during the periods from 2008-2010. Average default rates for each of these regions were then included in the study data. The performance of VantageScore 2.0 was compared to both VantageScore Solutions’ earlier version and to an industry benchmark credit score.
The full study is available at http://www.vantagescore.com/research/stresstest/.
About VantageScore Solutions
Stamford, Conn.-based VantageScore Solutions, LLC (www.vantagescore.com) is an independently managed company that holds the intellectual property rights to VantageScore, a new generic scoring model introduced in March 2006. Created by America’s three major credit reporting companies (CRCs) ” Equifax, Experian and TransUnion ” VantageScore’s highly predictive model uses an innovative, patent-pending scoring methodology to provide lenders with a more consistent interpretation of consumer credit files across all three major credit reporting companies and the ability to score more people.