U.S. Structured Finance Newsletter – June 2, 2017
Credit Score Components
Contacts
Claire J. Mezzanotte
Group Managing Director
Global Structured Finance
+1 212 806 3272
[email protected]
Mike Babick
Senior Vice President
ABS Structured Finance
+1 212 806 3229
[email protected]
Chris D’Onofrio
Senior Vice President, ABS
Structured Finance
+1 212 806 3284
[email protected]
Jayce Fox
Vice President
ABS Structured Finance
+1 212 806 3261
[email protected]
Lain Gutierrez
Senior Vice President, ABS
Structured Finance
+1 212 806 3922
[email protected]
Jerry van Koolbergen
Managing Director
Structured Credit
+1 212 806 3260
[email protected]
Sergey Moiseenko
Senior Vice President
ABS Structured Finance
+1 212 806 3225
[email protected]
Chris O’Connell
Senior Vice President
ABS Structured Finance
+1 212 806 3253
[email protected]
Jon Riber
Senior Vice President
ABS Structured Finance
+1 212 806 3250
[email protected]
Quincy Tang
Managing Director
RMBS Structured Finance
+1 212 806 3256
[email protected]
In 2006, VantageScore Solutions was introduced as a joint venture between three
national credit bureaus – Experian plc, Equifax Inc. and TransUnion – aimed at providing
an alternative solution to the widely used FICO score through the introduction of the
VantageScore. Recently, evidence points at VantageScore gaining traction in consumer
lending and, by extension, in structured finance. The inclusion of VantageScore as a credit
metric was originally seen in student loan refinancing asset-backed securitizations (ABS),
but is now enjoying wider adoption in structured finance. As such, industry participants
have been, and will continue to be, increasingly exposed to VantageScore. Below is a brief
overview of VantageScore and how it compares to FICO.
The FICO score was introduced to lenders almost 30 years ago by the Fair Isaac
Corporation (FICO); FICO released its latest model, FICO Score 9, in 2014. VantageScore
Solutions released the most recent version of its credit score, VantageScore 3.0, in
2013. Both models analyze an individual’s creditworthiness and ability to repay debt
obligations. Although both VantageScore and FICO use the same range of 300 to 850
to score creditworthiness (850 representing the lowest risk), some of the criteria and
relative weights used to arrive at each score differ. Exhibit 1 and Exhibit 2 provide a
contrast of the components used by each model:
Exhibit 1: FICO Score Components
New Credit, 10%
Exhibit 2: VantageScore Components
Recent Credit, 5%
Payment History, 35%
Available Credit, 3%
Payment History, 40%
Balances, 11%
Credit Mix, 10%
Utilization, 20%
Length of
Credit History,
15%
Amounts Owed, 30%
Depth of Credit, 21%
While there are some differences in the weights and attributes used in both models, there
is also a degree of overlap. For example, both models consider the borrower’s payment
history, which is a consideration of whether the borrower has paid his/her accounts on
time in the past. Borrowers who have skipped payments on multiple occasions in the past
will experience a negative impact on their credit scores. The VantageScore assigns an
additional weight of 5% over FICO with respect to payment history.
Kathleen Tillwitz
Managing Director
Operational Risk
ABS/RMBS Structured Finance
+1 212 806 3265
[email protected]
Chuck Weilamann
Managing Director
ABS Structured Finance
+1 212 806 3226
[email protected]
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U.S. Structured Finance Newsletter – June 2, 2017
While some of the attributes have different names, by comparing the breakdowns and combining aspects that are similar between
the two, one can observe the similarities and, more significantly, the differences. Taking into account such combinations, Exhibit 3
illustrates the relative weights and overlap in components. (The VantageScore components are denoted by *.)
Exhibit 3: FICO Score and VantageScore Components Compared
45%
40%
35%
40%
35%
30%
30%
31%
25%
25%
21%
20%
15%
10%
10%
5%
5%
0%
Payment History
Amounts Owed
*Balances & Utilization*
Length of Credit History &
Credit Mix
*Depth of Credit*
FICO
New Credit
*Recent Credit*
3%
Available Credit
VantageScore
The “Amounts Owed” FICO component considers the amount of debt owed to lenders and the number of accounts with debt
outstanding relative to the borrower’s total credit lines. This single attribute is similar to VantageScore’s “Balances” and “Utilization”
components, that, when combined, account for an almost equal weight as FICO’s “Amounts Owed”. According to a December 2013
VantageScore Solutions white paper entitled VantageScore 3.0, the “Balance” component considers the “total amount of recently
reported balances (current and delinquent),” while “Utilization” refers to the “proportion of credit amount used/owed on accounts.”
FICO scores also take into account the borrower’s “Length of Credit History” and “Credit Mix”. Typically, a borrower who has a
demonstrated history of open accounts in good standing will realize a higher FICO score. Also, a borrower who can diversify his/
her debt options, while managing to keep those accounts in good standing, will usually benefit from a higher FICO score. These two
attributes can be compared to VantageScore’s “Depth of Credit” which describes the age and type of credit used by the borrower.
When “Length of Credit History” and “Credit Mix” are combined, they account for 25% of a borrower’s FICO score, versus 21%
with respect to “Depth of Credit” in a VantageScore. Consumers with limited credit histories are often called “thin file” consumers.
Based on a review of the scoring, a thin file will likely experience less of a derogatory impact on their VantageScore than on their
FICO score.
Both scores incorporate the extent to which the borrower’s accounts are new/recent and whether there have been new/recent credit
inquiries. This component accounts for twice as much of the weighting in determining the VantageScore (versus the FICO score). In
addition, approximately 3% of a borrower’s VantageScore considers the total amount of credit available to the borrower. FICO does
not specifically address this factor with a separate attribute but available credit is captured through credit utilization characteristics.
In addition to the contrasts in components and weightings, FICO and VantageScore each possess minimum scoring criteria.
VantageScore Solutions asserts that its model “reaches a new milestone by providing a predictive credit score to 30-35 million
more adults than conventional scoring models.” These incremental scores result from the disparity in credit history requirements:
As disclosed in the VantageScore 3.0 white paper, the VantageScore model scores new populations that have less than 6 months
of history on their credit file, have updates to their credit file within a 6 to 24 month window, have trade activity that is at least 24
months old or have no open trades. FICO Score’s minimum score criteria, which has remained consistent across its history, includes
that the consumer cannot be deceased, the credit file needs one trade line reported by a creditor within the last six months and the
credit file needs one trade line that is at least six months old.1
Although the treatments with respect to thin files and paid collection debt may seem more equitable to the consumer, it is worth
considering how widely the various models of FICO and VantageScore were used by lenders. VantageScore Solutions states that
over 6 billion scores were used in 2014-2015, which was double the 2013-2014 figure. The company also states that their credit
1FICO, To Score or Not to Score? (White Paper). Number 70–September 2013.
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U.S. Structured Finance Newsletter – June 2, 2017
scores were used by over 2,000 lenders and 70% of the largest banks in 2014-2015. However, the frequency of actual VantageScore
usage is unknown. By contrast, FICO reports that over 10 billion FICO scores are sold each year, with 90% of all lending decisions in
the United States relying on them. In structured finance, the manner of usage of credit scores varies. Some sectors, like residential
mortgage securitizations, rely heavily on credit scores as a predictive element in assessing expected losses. Other sectors may
incorporate their use more passively, like auto loans, which mainly use credit scores to stratify credit tiers for analysis of historical
performance data.
Various options are available to lenders to assess a borrower’s creditworthiness, including the FICO score and VantageScore. It is
important for consumers seeking to use these metrics to understand the various elements considered in the two analyses and the
comparability of these components. Based on some of these differences in scoring, VantageScore provides the ability to report on an
additional portion of the borrower universe, increasing the number of tools for lenders considering thin file and similar consumers.
Concurrently, lenders need to adequately understand the differences in the two analyses and utilize the outputs accordingly. With
respect to securitization, market participants could see more consumer loan originators utilizing VantageScore and correspondingly
becoming a credit consideration in structured finance transactions.
For questions or comments, please contact Chuck Weilamann at [email protected] or Shanice Thompson at
[email protected].
Note: This version is corrected to clarify the minimum scoring criteria for FICO and the new scoring populations for VantageScore.
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