We have been pursuing the topic of Financial Health with a necessary focus on the underserved, unbanked and credit invisibles. A critical aspect of Financial Health involves an understanding of what data components are represented in credit scores used today. A healthy percentage of the U.S. consumer population holds misconceptions about the types of data represented in today’s scores. A survey conducted last year by Consumer Federation of America and VantageScore Solutions cited that “forty-two percent of respondents incorrectly thought their age and marital status were among the factors used to calculate a credit score”. More information from the findings of the survey can be found here.
Many types of credit scores used in the industry
There are several types of credit scores leveraged today by financial institutions for credit assessment. The list below describes the most often applied types of credit scores.
- Generic (off-the-shelf) credit bureau-based scores – leverage information contained within the three national credit reporting agencies (Experian, TransUnion, and Equifax). The data components used in these scores reflect information relating to credit tradelines, credit inquiries, and public records. Generally speaking, the five critical elements of these scores are delinquency and derogatory history, utilization of existing credit amounts, recent inquiries for credit, recent tradeline openings, and the length of credit history. These scores are tagged as generic because they leverage a development sample that is the same for all lenders using the score, that is, the sample used is not specific to a particular lender’s applicant distribution.
- Custom credit bureau-based credit scores – are similar to the generic credit bureau-based credit scores, except custom scores use development samples that represent a specific representation of consumers, attempting to closely resemble a lender’s through-the-door applicant population.
- Generic (off-the-shelf) and custom credit scores that utilize alternative data – along with the information contained within credit bureau-based credit scores, these scores incorporate other types of data to enhance the number of consumers that are able to be scored and to increase the statistical lift of the scores. Examples of alternative data sources include property information, asset information, professional license information, education information, evictions, criminal records, payday lending tradelines and inquiries, and payment information related to telecommunications and utility companies.
Consumers that are new to credit, and/or consumers that have not had credit for quite some time, need to know what types of information are being collected and used within credit scores. This understanding can be helpful in allowing them to improve certain aspects of their financial standing, so they have a better chance of obtaining credit with the best possible terms.
One widely used source of alternative data within today’s credit scores is the alternative data from LexisNexis® Risk Solutions. Clickhere to learn how LexisNexis® Risk Solutions alternative data and analytic services are empowering lenders to develop affordable lending and banking solutions.