vantagescore solutions 2011 annual validation · as a result, credit card issuers must focus...
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© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
When the recent recession reverberated throughout the credit markets, the credit card industry was particularly susceptible. Being unsecured, transactional in nature and subject to the ebb and flow of a consumer’s spending rate, the industry experienced significant disruption and consumer spending declined. Federal Reserve data reveals that after peaking at nearly 500 million new accounts in 2008, credit card originations fell below 400 million in 2010. On the account management side, card issuers sought to limit exposure, and in some cases reduced credit lines and closed inactive accounts.
In the current environment, credit card companies are increasing their marketing efforts as demonstrated by an uptick in credit card inquiries, a sign of demand. Credit card delinquency rates are also showing signs of improvement. One of the three national credit reporting companies (CRCs) recently issued an analysis that showed credit card delinquency rates are at historic lows, and that competition for low-risk borrowers is strong. With competition so intense, issuers cannot afford miscalculations.
VantageScore 2.0 was built on a performance sample of 45 million consumer credit files over multiple time frames taking into account the mortgage meltdown and the great recession to capture how these events have changed consumer behavior. The model accurately predicts how consumers are changing their behavior based on these events.
This comes into focus as headwinds such as continued high unemployment and increasing home price depreciation remain lurking as a potential spoiler to the credit card industry’s recovery. As a result, credit card issuers must focus efforts on rebuilding their portfolios in a more intelligent way.
Knowing this, and in order to provide issuers with added confidence, VantageScore 2.0—the model’s second version—was recently validated to measure predictiveness in a variety of contexts and environments.
This paper provides an overview of the results and a more concentrated examination of VantageScore 2.0’s performance within the credit card industry vertical specifically. VantageScore 2.0 was tested against generic credit score models provided by the three CRCs. Results presented in this paper are based on how VantageScore 2.0 compared against a single benchmark model; however, results were similar across all three.
OVERVIEW
VantageScore Solutions 2011 Annual Validation Affirms Model’s Predictive Power for the Credit Card Industry
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February 2012
© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
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VantageScore 2.0’s KS statistics are provided below at the overall level, and specifically for bankcard on both new account origination and existing account management. VantageScore 2.0 continues to outperform the benchmark model, most notably for existing account management, as seen in Figure 1.1
PREDICTIVE PERFORMANCE
FIGURE 1NEW ACCOUNTS EXISTING ACCOUNTS
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
VantageScore 2.0 CRC Model
55.45 54.41
63.99 63.30
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
VantageScore 2.0 CRC Model
60.7363.02
60.4858.83
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL AUTO
VantageScore 2.0 CRC Model
55.45 54.41
46.9243.90
VantageScore 2.0 outperformed all CRC benchmark scores. For percentage comparisons, the median KS result from the benchmark scores is used.
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© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
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VantageScore 2.0 was designed at the peak of bankcard volatility. A broad range of diverse consumer behaviors were captured within the algorithm design, resulting in continued excellent predictive strength. See Figure 2.
SCORE STABILITY
FIGURE 2NEW ACCOUNTS EXISTING ACCOUNTS
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
55.4552.62
63.99
VS 2.0 Validation VS 2.0 Development
56.00
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
VS 2.0 Validation VS 2.0 Development
60.7363.02 65.5363.43
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL AUTO
VS 2.0 Validation VS 2.0 Development
60.73
51.3054.13
63.43
VantageScore 2.0 uniquely uses a set of leveled characteristics across the three CRCs. As a result of these leveled characteristics, the identical algorithm is used to calculate a credit score at each CRC. The benefit is that both lenders and consumers obtain a more consistent risk assessment when obtaining scores from multiple CRCs. Over 82% of consumers receive scores within 40 points from across multiple CRCs, as seen in Figure 3, which translates into very consistent risk assessment.
FIGURE 3
CONSUMER SCORE CONSISTENCY
<20 Points
<40 Points
60.40%
82.00%
63.30%
84.10%
66.50%
86.10%
CRC1 — CRC2 CRC2 — CRC3 CRC1 — CRC3
© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
Scores for consumers originating new bankcard accounts have trended higher over the last several validation periods.
Risk distribution for existing account management in bankcard has remained largely consistent for the last several years. As a result strategy score cut-offs continue to reflect the same degree of risk, reducing the need for ongoing score to risk realignment.
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CONSUMER SCORE DISTRIBUTION
FIGURE 4VANTAGESCORE 2.0 SCORE DISTRIBUTION: BANKCARD NEW ACCOUNTS
VANTAGESCORE 2.0 SCORE DISTRIBUTION: BANKCARD EXISTING ACCOUNTS
100
90
80
70
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10
0
% O
f Pop
ulatio
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Score Range
Development 2008-10 2009-11
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% O
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Development 2008-10 2009-11
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Development 2008-10 2009-11
A validation was also performed for VantageScore 1.0 to ensure the earlier version remains predictive. This original VantageScore version was developed using data from the 2003 – 2005 timeframe and validation results demonstrate continued predictiveness.
VERSION 1.0
© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
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SCORE PREDICTIVE PERFORMANCE
FIGURE 5NEW ACCOUNTS
FIGURE 6NEW ACCOUNTS
EXISTING ACCOUNTS
EXISTING ACCOUNTS
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
55.49 54.41
64.12 63.30
VantageScore 1.0 CRC Model
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
55.49 56.54
64.12
55.21
VS 1.0 Validation VS 1.0 Development
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
60.3863.05
60.48
VantageScore 1.0 CRC Model
58.83
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL BANKCARD
60.3863.05
VS 1.0 Validation VS 1.0 Development
65.1367.63
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL AUTO
55.49 54.41
46.4943.90
VantageScore 1.0 CRC Model
KS R
esult
s
70
60
50
40
30
20
10
0OVERALL AUTO
60.38
51.9955.80
VS 1.0 Validation VS 1.0 Development
65.13
A highly effective measurement for model validation is a comparison of KS results from models developed using the same timeframe. Figure 6 compares VantageScore 1.0 to the benchmark generic model developed by one of the CRCs. Results show that KS values are higher overall and relative to the credit card sector.
While it’s natural for all models to expect some level of deterioration over time, VantageScore 1.0 continues to be an effective risk management tool. Figure 7 below compares VantageScore 1.0’s performance at development versus its 2011 validation.
SCORE STABILITY
© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
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CONSUMER SCOREDISTRIBUTION
Similar to VantageScore 2.0, score distribution for consumers issued new credit card loans has trended higher, and risk distribution for existing account management in the sector has remained consistent.
FIGURE 7VANTAGESCORE 1.0 SCORE DISTRIBUTION: BANKCARD NEW ACCOUNTS
VANTAGESCORE 1.0 SCORE DISTRIBUTION: BANKCARD EXISTING ACCOUNTS
100
90
80
70
60
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20
10
0
% O
f Pop
ulatio
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Score Range
2007-09 2008-10 2009-11
100
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% O
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2007-09 2008-10 2009-11
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% O
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Score Range
2007-09 2008-10 2009-11
© Copyright VantageScore Solutions, LLC 2012 VantageScore.com The New Standard in Credit Scoring
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CONCLUSION Competition for low-risk borrowers is very intense in the credit card industry. As issuers seek intelligent ways to increase origination volumes and maximize the performance of existing accounts, relying on an accurate risk assessment tool that takes into account current trends is paramount.
A new era in the credit card market requires a new approach to risk management. VantageScore 2.0 can help guide an issuer’s strategy, and be an important quiver in an increasingly competitive market.