The following is a guest post by a Prosper member: CreditKarma… You can use the Prosper Performance tool to estimate default risk for Prosper loans.
When I was a marketing and risk analyst with a credit card issuer, the customer’s credit score never really mattered per se. My concern was always with the default risk for any given score. For example, it was more important to know that a 720 FICO™ Score customer had a 1 in 237 probability of default. The score was meaningless to me (the lender) without the corresponding risk probability.
As such, I always wondered why Fair Isaac and credit bureaus used arbitrary scores when default risk is so much more informative to all parties. If I had to speculate, I would guess the following reasons:
- Intellectual Property Protection - It is probably much easier to patent and copyright some arbitrary score and score algorithm than it is to patent logistic regression (the math term used in developing scores) and an arbitrary score range.
- Consumers Don’t Want to Be Labeled - Consumers may object to such an outright classification as default risk. To say one person is a 450 FICO™ is probably not as offensive as saying that person has a 1 in 3 chance of defaulting on a loan.
Today, the reason is moot as it has become ingrained in consumers. As I read the comments in various blogs and discussion forums, I am still amazed at the level of mis-information accepted as truth. People claiming there certain scores are FAKO’s* or that doing X will yield Y result in your score. I personally think the confusion stems from the number of data sources, models, default variables, and uses of scores. It took me a degree in mathematics, economics, and 10 years of industry experience just to get my arms around credit scores and credit uses.
All this brings me back to the question: why doesn’t the industry just share your default risk? Isn’t that just an easier thing to understand than some arbitrary score range. Some people may object to a probability label but as they say, “a rose by any other name…”
Editor’s Note: *FAKO or Fake-O has been around for years, but the term was popularized by Suze Orman fairly recently. Orman is, admittedly, on Fair Isaac’s payroll.
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