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© 2010 VantageScore Solutions, LLC. All rights reserved. The VantageScore mark used herein is the registered trademark of VantageScore Solutions, LLC. No part of this copyrighted work may be reproduced, modified, or distributed in any form or manner without the prior written permission of VantageScore Solutions, LLC

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Understanding credit scoring behavior given recent credit challenges

Sarah Davies, VantageScore Solutions

Kari Michel, Experian

Confidential Information of VantageScore Solutions, LLC © 2010

2VantageScore Solutions, LLC © 2010, All Rights Reserved


Credit quality

As we near the end of a recession where credit quality has deteriorated across the entire credit spectrum

► How and where has consumer credit quality changed over the last 24 months?

● Review of recent events and score trends

► Can consumers of stable or improving credit quality be identified for lender focus for acquisition or improved existing account profitability?


Recent events and score trends

Mortgage restructuring and payment hierarchy shifts

► Trends in mortgage payment hierarchy

► Score impacts from mortgage restructuring scenarios

► Score rehabilitation

Bankcard credit line decrease

► Consumer responses to expansive credit limit reduction strategy


Payment behavior is shifting

Consumers with at least one delinquent trade are increasingly paying their card and auto before their mortgage

* Clean: Debts maintained in good standing, although an occasional 30-day delinquency may have occurred. Data used throughout presentation provided by TransUnion

First mortgageclean* with otherdelinquencies

First mortgagedelinquent, butall other trades clean*

First mortgagedelinquent, withother delinquencies

First mortgagein derogatorystatus (bankruptcy,foreclosure, short sale, settlement, etc.

% o

f del

inqu

ent p

opul

atio

n


Score impacts from mortgage restructuring scenarios

No impact when payments are made on scheduleAccount removed with deferral

Utilization reduction overallAverage account age reduced due to new loanHigher loan amountAge reduced from new loanUtilization reduction

Account highly delinquent

Derogatory status

Derogatory status, public record


Consumer VantageScore rehabilitation

500

600

700

800

900

Starting Score Score After Mod

3 mo. 6 mo. 12 mo. 24 mo.

VantageScore

All trades become current Only mortgage becomes current Bankruptcy

Nine months

Consumers can rehabilitate their score within nine months if they can bring all debts current with a restructure


Bankcard credit limit adjustments in Q1 2009 – What happened?

Credit limits are frequently adjusted (up and down) within a nominal range according to individual bank strategies

► The December 2008 – March 2009 quarter reflected the first time that limits significantly decline

‐5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09

Average credit limit charge


Approximately 49% of consumers received a reduction, 14% received an increase

Average credit limit reduction was 19%, average increase was 15%Note that credit limits are already significantly higher than typical balances, particularly in the high score bands – the majority of the credit limit reduction focused on high credit quality bands

Total active bankcard credit line


Open bankcard trades

Available credit was also impacted by significant account closures, typically inactive accounts

Number of open bankcard trades


Consumer balances and utilization

Low score consumers respond to the credit adjustment, although most remained far below their limit and experienced no material impact

Total balance on open bankcards


Consumer delinquency trends

Pre- December 2008 delinquency may have been a factor in credit line reductionRegardless of the nature of limit adjustment, environmental factors play a greater role in driving delinquency

Number of bankcard trades 30+ days delinquent in the last three months


Consumer delinquency trends

Regardless of the nature of limit adjustment, environmental factors play a greater role in driving delinquency


Impacts to scores

Credit scores reflect a slight reduction due to limit reduction

Average VantageScore®


Impacts to scores

CLI and CLD populations reflect similar score profiles despite opposite limit adjustment

500-600 Score Band 700-800 Score Band

DecreaseIncreaseNo change

DecreaseIncreaseNo change

30+ dpd index 30+ dpd index


Bankcard credit limit adjustments in Q1 2009 – In the end...

The majority of card line reductions have had no adverse impact on consumer behavior

From a risk management perspective, the line reductions and account closure initiatives have removed a significant portion of excess, unused credit from the system

June 2008 June 2009 Difference

Total Number of Open Bankcard Trades 399,398,505 324,066,226 (75,332,279) Total Credit Limit on Open Bankcard Trades 3,321,425,173,165$ 2,665,010,717,735$ (656,414,455,429)$ Total Balance on Open Bankcard Trades 573,298,609,432$ 527,477,828,627$ (45,820,780,805)$

Average Credit Limit 8,316$ 8,224$ Average Balance 1,435$ 1,628$ Average Utilization 17% 20%


Consequently, how have consumer scores and risk changeover the last 24 months?

Consumer score migration profileSuper prime (900-990)


Consumer score migration profilePrime(700-899)


Consumer score migration profileNear-prime (640-699)


Consumer score migration profileSubprime (501-639)



Increasing environmental credit deterioration

As a result of increasing environmental credit deterioration,score cut-offs should be reviewed and revised accordingly

Example: 90+ days past due for a consumer with a score of 730 has increased by 80% (from 1.0% to 1.8%)

Existing accounts – 90+ days past due: All industries


Given the dynamics of risk deterioration across the entire credit spectrum…

Can credit worthy consumers be identified using credit scores in conjunction with additional credit file insights?

► STABLE: Consumers that stay within the samecredit tier for one year

► IMPROVING is defined as consumers that move to a higher credit tier in any quarter and remain at a higher credit tier for the remainder of the timeframe

Further, are there segments that should be avoided despite apparent creditworthiness?

► DETERIORATING is defined as consumers that move to a lower credit tier in any quarter and remain at a lower credit tier for the remainder of the timeframe

Signaling

Credit footprint

Utility


Identifying creditworthy consumer segments with scores and credit characteristics

Stable populationDistinguishing characteristics when compared against all other behavior categories



More than 50 million consumers can be identified who demonstrate robust and stable credit quality (prime and super prime)

► Of which more than six million consumers are unscoreable with traditional credit scores



Improving populationDistinguishing characteristics when compared against all other behavior categories



Nearly 11 million consumers can be identified who’s credit quality improves over time

► Of which more than one million consumers are typically unscoreable


Identifying non-creditworthy consumer segments with scores and credit characteristics

Deteriorating populationDistinguishing characteristics when compared against all other behavior categories


Identifying non-creditworthy consumer segments with scores and credit characteristics

Eleven million consumers can be identified with declining credit quality

► Eight million of these consumers are currently prime and super prime quality


Summary

Over 50 million consumers can be readily identified using VantageScore®

and key credit characteristics as creditworthy

► Seven million of these consumers are traditionally unscoreable with standard score algorithms

Eleven million consumers can be identified that are likely to experience continuing deterioration in credit quality

Lenders can apply a similar approach to their universe and portfolios in order to effectively isolate profitable populations for acquisition and existing account management strategies with VantageScore®

and credit file behaviors using segmentation logic strategies

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