Credit Score Conundrum

I’m a paradox. I love technology, but sometimes think I would have enjoyed living more in older times. In a lot of ways, I’m very old-school. Take baseball, for instance.

I hate the specialization that has evolved over the past 30 years, especially when it comes to pitching. There was a time when the pitcher who took the mound in the first inning was the pitcher who came off the field in the ninth inning. In 1968, Denny McLain won 31 games for the Detroit Tigers, which was the last time a pitcher won 30 games in a season. He completed 28 games that year. Last season, Roy Halladay led the major leagues with nine complete games. That number is so small, that Associated Press style rules dictate I spell out the number.

Stay with me. I promise to bring this back to auto finance soon.

Specialization has become the standard in baseball. There are starting pitchers, short relievers, long relievers, left-handed specialists, eighth-inning relievers, and closers. Who knows how much more specialized these roles will become. One can certainly point to the increased usage of statistics and data as a key driver of this specialization.

Ready? Here’s where the boomerang starts coming back.

There is a whole whack of data and statistics that get analyzed when determining a consumer’s credit score. Payment history, salary, debt-to-income ratios, amount of debt outstanding, debt usage ratios…The list goes on. Yet, I have only one credit score. Why is that?

If I am running an auto finance operation, do I care whether you pay your Sears bill on time? What if a borrower has never missed an auto loan payment, but is delinquent on every credit card? As an auto lender, to what extent should I take that into consideration? Under this scenario, the borrower would have a terrible credit score. But they represent a solid credit risk for a car loan because the person has never missed a payment.

This leads me to the point of this post. Why isn’t there more specialization in credit scoring? Why are there only three bureaus and each bureau only spits out one score for each individual? Why isn’t there the equivalent of a cadre of relief pitching specialists? Why aren’t there different credit scores for different asset classes? Why is the big picture the only one worth looking at when it comes to analyzing credit-worthiness?

This idea brings me back to about 10 years ago, when I first started writing about the subprime mortgage industry. One of the first terms I learned was “story loans,” which is how a lot of lenders thought of the subprime industry. They were called story loans because every subprime credit score had a story attached to it. And that story was what needed to get analyzed before making a decision on a loan application. I don’t think that the auto finance industry needs to revert to manual loan underwriting, but certainly with all the data that is available, someone might be able to develop a specific credit risk profile for specific scenarios, either loan amounts or asset classes.