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FRB Study: Credit Scores Improve Credit Availability and Affordability
By Alton Gary Simpson
CHICAGO -- Credit reporting agency TransUnion applauded the Federal Reserve Board Division of Research and Statistics' latest study, which concluded that credit scoring has improved credit availability and affordability, and is predictive of credit risk for the general population.
"The Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit," concerning the affect credit scoring has on various population segments -- and a similar study by the Federal Trade Commission -- were mandated by Section 215 of the Fair and Accurate Credit Transactions Act of 2003.
The FRB study considered public comments submitted specifically for the report and past research on the topic. In addition, the FRB used a representative sample of more than 300,000 de-personalized credit records of the same individuals from two distinct points in time -- June 30, 2003 and December 31, 2004. This allowed the FRB to create its own generic scoring model to compare its findings with TransUnion's proprietary generic risk scoring model and VantageScore. According to the executive summary of the study, "Evidence provided by commenters, previous research and the present analysis supports the conclusion that credit has become more available over the past quarter-century. Credit scoring, as a cost- and time-saving technology that became a central element of credit underwriting during that period, likely has contributed to improved credit availability and affordability. However, in part precisely because the use of credit scoring became widespread decades ago, only limited direct information could be obtained on the contribution of credit scoring regarding availability and affordability."
The summary continued, noting that the increase in credit availability appeared to hold for the general population as well as for major demographic groups, including different races and ethnicities. "There is no compelling evidence, however, that any particular demographic group has experienced markedly greater changes in credit availability or affordability than other groups due to credit scoring," concluded the study's summary, although it did note that credit scores -- and credit outcomes for a given credit score -- differed substantially between different demographic groups.
The study further concluded that credit scoring had increased the efficiency of consumer credit markets by helping creditors set prices more consistent with the risks and costs inherent in extending credit. It also recognized that on average, the inclusion of specific individual credit characteristics used in credit scoring models had no adverse affect on credit scores for the general population.
The FRB study mirrors recent findings from the FTC's study on applying credit scoring in the insurance industry. That study concluded that "credit-based insurance scores are effective predictors of risk under automobile policies" and the "use of credit-based insurance scores may result in benefits for the consumers ... granting and pricing insurance quicker and cheaper, cost savings that may be passed on to consumers in the form of lower premiums."
Chet Wiermanski, analytic and decision services group vice president, TransUnion, said "For more than 20 years, using credit information and scoring models has created financial advantages for millions of consumers and businesses domestically and internationally, granting them access to the credit they deserve, while effectively managing risk. Once again, the Federal Reserve Board's study validates the predictability, objectivity and benefits of credit scoring."
While both studies validated the predictive nature of credit scoring in all population groups and the benefits to both business and consumers, each drew attention to the fact that certain sub-groups of the population may not receive the full benefit of credit scoring because of various socio-economic circumstances, such as an individual's economic circumstance, financial literacy or employment history. The FRB study noted that analysis of credit scores and performance among these sub-groups is limited because credit records do not contain demographic data such as sex, gender, race or age.
Mr. Wiermanski noted that TransUnion is working on bridging this gap to reach individuals who may fall outside the traditional scoring system. "By introducing a new thin-file scoring model, our research efforts with the Political and Economic Research Council and the Brookings Institution and our educational work and financial support of Operation Hope, TransUnion is committed to bringing the benefits of credit to a broader, more diverse population," he said.
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