Organizations in several industries rely on credit information for adjudication and account management, using credit scores in particular to assess the inherent risk of a consumer before accepting an application or choosing to make an offer. But, while credit bureau data may be up to date, the credit scores organizations use could be anything from a month to a year old. As TransUnion’s Laurent Holleville, Advisor, Business Consulting, explains, significant shifts in these scores mean a material change in risk — something organizations should look to monitor and be aware of.
When is a credit score not a reflection of risk?
When it’s not today’s credit score. That is, the score being used has not been refreshed with the most recent version available from a credit bureau.
Organizations use credit scores for several activities, depending on the industry: account origination, underwriting, marketing to their customers and account management, to name a few.
Most opt to do a bulk refresh of those credit scores across their portfolio rather than performing a single refresh at the point of activity. These bulk updates could happen as frequently as once a month or even once a quarter; some take place only once a year.
This practice is understandable, given the cost involved, but is it always best practice? And if not, what’s the alternative?
The 30-point difference: what the data says
In a study that explored changes to Canadian consumers’ CreditVision Risk Score over a year, we found that a small but significant number of consumers (18%) experienced a material change, meaning a change of 30 points or more, in their risk score over that period.
Here’s what we found:
- If a consumer’s CreditVision Risk Score decreased by 30 points, there was twice the probability for that consumer to become 90+ days delinquent. Inversely, if the score improved by 30 points, the risk would drop by half. We defined this as a material change.
In the population we looked at, 9% of consumers saw an increase of at least 30 points over one quarter while 8% saw a decrease.
We also found that 2.5% of consumers receiving an alert in the population study saw a decrease of 140 points or more – indicating that the consumer was ten times as likely to go 60+ days delinquent.
The real cost of the credit score refresh
Individual credit scores reflect the consumer’s inherent risk, which means they’ll change over time as an individual’s situation changes. Sometimes, as we see above, these changes are material, indicating a significant change in risk in either direction.
Even if a bulk refresh is done monthly, there could be a change to a customer’s score between the first of the month, when the refresh is done, and the 29th, when you’re using that score to assess their risk. And that change could be material.
The real cost of not refreshing these scores, then, is either a missed opportunity when a customer is actually a lower risk than their (possibly outdated) credit score indicates, or the likelihood of taking on more risk than you have appetite for because the (older) score you’re looking at is higher than the current score.
But, are there are alternatives to the bulk, monthly or less refresh that can help reduce risk?
Options for monitoring material changes
Some organizations choose to update scores more frequently for just a segment of their portfolio, then monitor that segment to see if anyone crosses a predetermined threshold. Others build the refresh into their processes for account management, cross-selling and setting limits.
Another way of keeping your finger on the pulse of changing risk profiles is by using Dynamic Monitoring. You’re alerted only to changes in the portfolio — the next day — so you can take action quickly.
It’s important to monitor material changes in individual risk across your portfolio so you can take advantage of new opportunities — for example, cross-selling or upselling — while protecting against riskier profiles. This becomes even more important during a downturn, when you’re likely to see more material changes.