I’m excited, thrilled even, by the switch to Prosper Ratings. Although the Prosper Ratings are still letter grades ranging from AA – HR they are radically different from the credit grades we used in prior years.
Before Prosper Ratings, there were Credit Grades, which were based solely on the Experian credit score.
Two listings with the same Credit Grade could have very different loss rates. As you’ve probably read on the site, new Prosper Ratings are based on an estimated loss rate, which in turn is based on a combination of Prosper Score and Experian credit score referenced against historical data. I guess when I put it that way, it doesn’t seem that exciting… so let me boil it down to the truly exciting part: Prosper Ratings aren’t just about a borrower’s Experian credit score.
Don’t get me wrong—Experian’s credit scores are very important when assessing a listing. They remain an easy one-glance way to start getting an idea of a borrower’s past performance when repaying their obligations. I’ve seen lenders run into problems when they tried to put too much faith in a Credit Grade, though. First, we don’t know exactly how Experian calculates that credit score. Do they put the same weight on the credit history details we’ve found have a big influence on loan performance amongst actual Prosper borrowers? Probably not.
Furthermore, there’s more to a loan request than just the borrower’s credit history. A 760 credit score borrower sounds great, after all, until you go on to see they make $1-$24,999 per year and are asking for a $25,000 loan. A Prosper Rating that considers the historical performance of actual Prosper borrowers is a huge step forward in accounting for these listing-specific details.
Some highlights of what affects a Prosper Rating:
1. Experian Credit Score
The credit score is still very important, and a major factor affecting a listing’s Prosper Rating.
2. Inquiries and delinquent accounts
Many inquiries are an indication that the borrower is seeking credit from multiple sources, while delinquent accounts indicates the borrower is already having trouble meeting existing financial obligations.
3. Loan Amount
The monthly payment amount for a loan has an effect on its loss rate, and that makes sense. The level of financial distress necessary to force you to default on a loan with a $35/month payment is a lot higher than on a loan with a $900/month payment.
4. Available credit on bankcards
Someone with a 99% bankcard utilization might have fewer options in a temporary financial emergency, driving them to default on a loan that another borrower might not have to.
Do you see why I’m excited yet? By basing the Prosper Rating off estimated loss rate, it should give lenders a better idea of how risky a listing is at first glance than Credit Grade alone ever could. Also, because Prosper Rating is affected by so many factors, it has simplified the criteria in my saved searches, portfolio plans and bidding decisions by quite a bit.
I’m happy to sing praise for anything in my life that improves both simplicity and accuracy at the same time.