Magazine article Mortgage Banking

Credit-Score Cutoffs Need Recalibration to Reflect Current Default Risk

Magazine article Mortgage Banking

Credit-Score Cutoffs Need Recalibration to Reflect Current Default Risk

Article excerpt

Credit scores don't stay constant in terms of the default risk represented by a borrower with a particular score. That is what some credit-trend research prepared by Stamford, Connecticut-based VantageScore Solutions LLC, has discovered.

So in other words, a borrower who had a 600 credit score in 2005 does not represent the same amount of default risk as a borrower with a 600 credit score in 2010.

VantageScore found, in fact, that lenders building their strategy around a 4.5 percent default level in 2005 would have set their credit-score cutoff at 600. But in 2010, that same credit-score cutoff would have resulted in an 8.5 percent default scenario. In 2010, to keep defaults in the 4.5 percent range, the credit-score cutoff actually would have to be raised to 660.

VantageScore offered another example in a research presentation titled "Risk Shift Trends." If a lender wanted to follow a 4.25 percent default strategy in 2005, it would have had to set a cutoff for credit scores of 600. In 2009, that same cutoff for credit scores would have resulted in an 8. …

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