This graph shows the evolution of credit scores over time. It's a great way of seeing how credit characteristics change over time. These credit characteristics can have a significant impact on a person's credit score. This article discusses the effects of dropping certain credit attributes and the impact of high-cost credit scores on credit scores.
Time series evolution of credit scores
The time series component of many credit decisioning tools is crucial. This data helps lenders determine the risk of a consumer by tracking how a consumer pays his or her bills over time. Lenders can gain a greater understanding of borrowers' late payments history by looking at time series data on their credit card balances.
The data is generally positive, but it could also indicate a downward trend. This is especially true of consumers in lower risk segments and lower scoring. The recent declines in the number of hard credit inquiries may be related to the renewed consumer focus on reducing spending and paying down debt.
Effects of dropping groups of related credit characteristics
One study examined the impact of removing credit characteristics that are related to a credit score. Dropping this group of credit characteristics raised the mean credit score by 2.5 points, or about one-fifth of a point. The differences were larger in people with younger credit scores compared to people with older credit scores.
A single credit score characteristic that is not included in the black average score has very little effect. The largest change in the mean black credit score was 0.1 point. The high correlation between these characteristics in our scoring model is what explains this small change. These differences were consistent across all three scorecards.
Other characteristics can have an effect
Traditionally, analysis of credit scores has only examined the effects of a single characteristic, such as age. Although it is not known how adding additional characteristics to a model can affect its effectiveness, it may be significant. To assess the effect of adding another attribute, the scorecard models were re-evaluated using the new characteristic. The results were compared to FRB's base model.
While the addition of race or ethnicity did not change the mean score, the inclusion of those characteristics would have an effect on the predictive value. However, removing these attributes would cause a significant decrease of model predictiveness for others.
Effects of high-cost credit
There are several reasons why taking on high-cost debt can negatively affect a credit score. It sends lenders a message that the borrower poses a risk to their credit. High-cost borrowing leads to higher defaults. This can have a negative impact on your overall financial situation. High-cost credit can have a negative impact on the borrower's social standing.
High-cost credit can reduce the demand for standard sources of financing and can restrict future access to those sources. A second reason is that high-cost borrowers may choose to take out high-cost financing, which can be more risky. Although this can help with short-term financial issues, it also limits the availability for standard sources of financing.