New Ways to Score Creditworthiness to Help More Borrowers Get Loans
Posted by Michael VanErdewyk
Chairman and CEO, YourLoanAdviser
The nation’s major credit rating bureaus (Equifax, Experian and TransUnion) have announced they will change the way they calculate credit scores by removing several debts that negatively affect a person’s FICO score. As a result, analysts indicate almost 12 million people could see their FICO scores rise later this year.
According to the bureaus’, the “lite” scoring system will give more borrowers a better chance at securing a loan than in the past by eliminating older debt and reducing inaccuracies.
Another new approach is to add (instead of removing) criteria to round out a borrower’s profile. By expanding credit scoring dimensions, lenders can more fully assess a borrower and their ability to repay, and more accurately price their loan for risk. For example, student lenders might include the borrower’s degree program in their decision-making where previously this data was lacking.
As an insurer of private student loans, we’re finding that demand for augmented scoring options is on the rise as our lenders look to reach new borrowers and more precisely and competitively customize their loan offers. To meet this demand, we introduced YourLoanAdviser Risk Grades, a proprietary scorecard that builds on traditional credit scoring criteria like FICO and adds unique new elements in order to more predictively identify the individual loan’s risk and opportunity where a FICO score or other, more limited, risk assessment may have missed the mark.
Lenders have a role in helping borrowers of all ages build up a credit history. In fact, Experian and other agencies’ moves come after The Consumer Financial Protection Bureau released a report citing that inaccurate and negative information on credit reports can derail consumers from being able to gain access to credit and even lead to other setbacks, like not being able to rent an apartment or get a job. On the student lending side, having access to credit can make up the gap between federal loan limits and the full cost of a four-year college education—about a $9,000 a year difference.
Our credit scoring is derived from 30 years and $15 billion in proprietary data we’ve accumulated since we began providing banks, credit unions and alternative lenders with private student loan solutions. This data has helped keep private student loan default rates the lowest in the private student loan asset class.
In all, we see YourLoanAdviser Risk Grades as the model of the future, combining traditional and unique scoring methods that give student lenders another way to look at how, and to whom, they lend. This new approach will help more students finance their education dreams as the cost of college continues to rise. And they’ll build credit history as well as a relationship with their lender that can last a lifetime.
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