Access to credit now consumes much of the discussion surrounding the housing market, which has not rebounded as fast as economists had hoped following the global financial recession. Scores of first-time home buyers, who typically make up about 40 percent of home sales, remain locked out of the market thanks to more stringent lending requirements. If mortgage lenders dropped the required credit score by just 50 points (on par with prerecession lending), then 12 million more people could gain credit and potentially purchase homes, according to a recent analysis by Mark Zandi, chief economist for Moody's Analytics. "It is difficult to see how the economy can achieve full employment over the next few years unless housing leads the way," Zandi wrote in a May research note.
VantageScore is not the only company to look for different ways to evaluate consumers' creditworthiness. Experian, one of the three big credit reporting bureaus, purchased a small company in 2010 to allow it to track rental payments as a way to measure a person's likelihood to pay off debt. A handful of financial startups have also entered the mix; one uses information from a consumer's social-media feeds, combined with private data from the credit bureaus, to determine a person's creditworthiness. Within the industry, there's talk of leaning on a payment as simple as a cell-phone bill or a person's remittances to his home country to factor into the almighty calculation of the credit score.
The problem with these different measurements? They all look to the past without predicting a consumer's ability to pay off debt in the future, says Annamaria Lusardi, a professor at the George Washington University School of Business and personal-finance expert. "We need a way to think about people's potential," she says. "The problem with having a static view is that just because a person, as an example, might be unemployed now does not mean that he will be unemployed in 30 years."
Far better, Lusardi says, would be to instead examine a person's current level of income, or the ratio of personal income to debt as a way to evaluate a person's creditworthiness. That's a strategy that Chi Chi Wu, a staff attorney at the National Consumer Law Center, also supports. Credit scores should also take into account the tough economic times individuals may face during a recession, like unemployment or a temporary inability to pay one's bills, Wu says. "Credit scores should distinguish between people who are a hot mess versus those who have just fallen on hard times. Giving them bad credit scores just keeps them down," she adds.
VantageScore does not incorporate social media into its credit-scoring models. Instead, the company leans heavily on the following ways to predict someone's credit score: The person's ability to pay bills on time, the history and type of credit he uses, and his total credit-card balances and total debts. A red flag pops up if someone accumulates huge amounts of credit very fast.