Over the past six months, there’s been a lot of marketing hype about scoring significantly more consumers than ever before. It’s an issue we regularly discuss with clients, and recently we did an in-depth pulse check with major lenders to deepen our understanding of how the FICO® Score can support their needs.
Not surprisingly, at the conceptual level, almost all lenders want to score more US consumers. But once we dug deeper, our findings were more nuanced. In brief, there was little support for solving this challenge by loosening the minimum score criteria used by the FICO® Score.
In our latest discussions, we talked to a disparate group of financial institutions, from very large organizations down to smaller and regional players, and from lenders focused on super-prime through to those targeting near-prime customers. We received input across various financial industries, ranging from revolving products to auto finance to mortgage, and various functional roles, including risk management, account acquisition, customer management and more. Some of the lenders are aggressively seeking growth, particularly those in auto finance, while others are taking a more conservative approach due to ongoing US economic uncertainty.
Across the board, we heard a good deal of skepticism at the notion of loosening minimum score criteria. Many expressed concern about scoring consumers with limited data on their credit reports, since the resulting credit scores would likely be less predictive and reliable (a concern reinforced by our latest research).
One lender shared that her organization would not be comfortable with a credit score based on one month or even three months of credit bureau history. Another perspective we heard was that most consumers without recently reported credit data have had trouble in the past, a pattern likely to repeat in the future. Regarding consumers without payment history, several lenders expressed the view that consumers with only negative data should not qualify for a credit score, as that data could only be used as a knock-out rule and not to score consumer risk. Another lender astutely pointed out the serious analytic risk in mixing heterogeneous groups together into the same scorecard.
Our conversations with lenders focused on whether sufficient credit history was present for accurate risk assessment. Interestingly, despite having more aggressive growth goals, auto lenders advocated the most conservative approach when it came to the question of tighter vs. looser minimum score criteria. One auto lender commented that even a file with eight trade lines could be considered thin, if all of the trade lines are deferred student loans or authorized user accounts. Those working in marketing departments leaned the opposite way, toward looser minimum score criteria. This makes intuitive sense since their primary goal is to grow the business rather than manage risk.
While there’s consensus around the goal of scoring more consumers, there appears to be a broad understanding that it’s unwise to do so solely using data found at the credit reporting agencies. Instead, could the answer rest in looking beyond traditional credit bureau data?