Credit scores are an imperfect measure of default risk. Someone with a credit score in the mid-600s is more likely to default in a weak economy than in a strong economy.
VantageScore Solutions, developer of the VantageScore credit scoring model, is launching an interactive tool designed to address this limitation, which it says can lead analysts to miss the true credit quality of a pool of loans. The Default Risk Index (DRI) tracks the changing levels of default risk in four major consumer lending categories.
Available at DefaultRiskIndex.com, it lets users monitor the shifting quarterly risk profile of loan originations in the mortgage, credit card, auto, and student loan categories. The DRI is derived using credit file data from TransUnion and VantageScore odds charts—tables furnished to VantageScore users that match values on the 300-850 VantageScore scale range with their corresponding probability of default values.
The index is a measure of relative changes in risk level, benchmarked against the third quarter of 2013, the first period for which data were compiled. Interactive tools at DefaultRiskIndex.com allow users to view trends for each loan category and freely download the data behind the charts.
It is available to institutional and individual investors, professionals in the securitization field, academics and all others interested in systemic lending risk. It will be updated quarterly, with data reflecting loans issued in the preceding quarter.
Mike Trapanese, VantageScore Solution’s senior vice president for strategy and strategic alliances, said that common practices, such as using a weighted average credit score or distribution by credit score band, can miss the true credit quality of a loan pool, obscure meaningful trends, and lead a well-intentioned analyst to the wrong conclusions.
“We developed the Default Risk Index to present a better way to use credit scores in evaluating categories or pools of loans,” he said in a press release. “As the securitization industry moves towards more loan-level data, there is an opportunity to use credit score disclosures in a more meaningful and accurate way. While the DRI is published at the national level, it demonstrates an approach that analysts can apply to their own portfolios and investment strategies.”
VantageScore Solutions is the independently managed company that owns the intellectual property rights to the VantageScore credit scoring models, including the VantageScore 3.0 model, which scores 30-35 million consumers typically not scored by conventional models without relaxing standards.