Could a Credit Scoring Change Benefit Debt Collectors?

The New York Times ran a feature-length piece Friday on how a prominent credit scoring service is treating collection accounts. The new scoring formula benefits consumers, but it could also present ARM companies with an opportunity and another tool to use in their collection efforts.

Debt collectors have long used the presence of collection accounts on consumers’ credit reports to compel them to pay and clear the accounts. Now VantageScore is eliminating paid collection accounts from credit reports altogether, no longer factoring them into the creditworthiness equation.

The Times article focuses on the change at VantageScore, a widely-used credit scoring product but one that lags far behind the industry leader FICO credit score. Paid collection accounts traditionally serve as a derogatory mark on a credit score. But VantageScore found that unpaid collection accounts are much better predictors of future payment behavior.

The company said, “We built the VantageScore 3.0 model knowing that consumers with paid and/or unpaid collection accounts are higher risk than consumers without these accounts, thus this information can be usefully predictive.  This is especially true for unpaid collections.  Using the more granular data in unique combinations that emphasized unpaid collections, we created variables that delivered greater predictive strength than paid collection variables.  Given the mandate to deliver the most predictive model, these new combinations were incorporated into VantageScore 3.0.”

Much of the rationale for deleting paid collection accounts comes from the proliferation of unpaid medical bills on consumer credit reports. Many deem unpaid medical bills as entirely unlikely to predict future payment behavior, as patients typically don’t choose to take on medical debt. In fact, VantageScore appears to be already following the directive of a bill in Congress right now that would require the removal of medical accounts from credit reports after they’ve been paid.

In order for the change to have more widespread impact, FICO will need to adopt it. But a company spokesperson said that it will continue to mark both paid and unpaid collection accounts as derogatory on consumers’ credit reports. FICO does not, however, include any collection accounts below $100.

This new development means that debt collectors can now point to credit reporting agency policy when trying to convince a consumer to pay off a collection account. If one of the major credit score aggregators is striking paid collection accounts from reports, it would be in the interest of consumers to pay the account.

If FICO decides to follow suit, then the argument will become even more compelling.