Loan attributes, like credit scores, loan to value ratios, and debt to income ratios, assist lenders when decisioning loan applications and migrating these attributes can paint a broader perspective of the historical landscape of the borrower. As a user of Visible Equity prior to becoming a product director here, I played in the VE sandbox daily, slicing and dicing data. Stratify by credit score? Yes! Migrate original LTV to most recent LTV? You got it. I went down rabbit holes daily and I loved it. Then, I would get to the bankruptcy score, and although I think it is a reputable indicator that reveals the likelihood of a borrower filing for bankruptcy within the near future, I was mystified at the lack of resources available to build my acumen. It seemed like this reticent secret, a hidden treasure of sorts, was reserved only for those who want to become connoisseurs of the analytical bankruptcy world jargon. But if used analytically to understand performance and future potential losses, this score could be advantageous and effective when understood more thoroughly.
What is a bankruptcy score?
Although there are bountiful amounts of information about traditional credit risk scores from all three credit bureaus, there is not a lot of public knowledge or instruction on bankruptcy scores. Furthermore, it appears that the logic and statistical manners that make up the score are concealed as well. However, in a simple sense, the bankruptcy score is a risk indicator, focusing on the probability of default on non-collateralized types of loans. It narrows in on the likelihood of a declaration of bankruptcy, which tends to tilt associated risks towards the unsecured portions of one’s portfolio.
Are all bankruptcy scores the same?
Absolutely not, and it’s critical if one is obtaining these scores on a consistent basis to understand which score is being collected, from which bureau, and the specifics of the score. Bankruptcy scores vary amongst the credit bureaus, including the range of scores, direction of scores and the weighing of information within each model.
Experian’s Bankruptcy PLUS score attempts to classify bankruptcy risk within 24 months, with a choice of score ranges. On one hand, their mainstream bankruptcy score range offers a range from 1 to 1400, and a lower score equates to lower risk. On the other hand, they offer a more traditional credit risk model score range from 300 to 900, and a lower score within this range equates to higher risk. So, to repeat myself, understanding which score and range you are utilizing is crucial to the success of your risk management programs.
TransUnion’s CreditVision Bankruptcy Score model predicts a future bankruptcy declaration within 12 months, and has a familiar range of scores from 300 to 850. In this range, however, the higher the score, the lower the risk. In addition, the CreditVision family of scores boast three other factors that are taken into consideration in the algorithm – account history of each tradeline pertaining to key data fields, actual vs. minimum payment transactional behavior, and extended payment pattern. TransUnion also offers a simple TransUnion Bankruptcy Score that predicts 12 months outward, with a range of 0 to 999, also translating the highest scores with the lowest risk.
Equifax’s Bankruptcy Navigator Index® (BNI) score forecasts the chance of bankruptcy within 24 months, with a range from 1 to 600, with lower scores being at a greater risk. Their scoring platform has evolved, making this model the fourth generation of their bankruptcy score.
You thought I was done, didn’t you? Not yet. Lastly, the FICO® Bankruptcy Risk Score (available from TransUnion and Experian) is an agency-based score, which states that its intent is to protect profits and prides itself on being the first tool in order to measure risk through a “bankruptcy loss ratio.” There are a few different models with different ranges, but the takeaway with this Fair Isaac Corporation bankruptcy score is that a high score equates to low risk.
So what is a good bankruptcy score, and what is a bad bankruptcy score?
I bet you might know my answer to this question – it depends. You must understand the score, range and direction you are utilizing before slicing and dicing your data, or you could make assumptions that are completely inaccurate. In all honesty, your best bet is to analyze your data specifically to tailor your wants and needs, creating matrices or scatterplots satisfying your taste. Not sure where to start? Here are two ideas to get you started if you haven’t analyzed your bankruptcy scores as of late.
Example 1: The chart below shows a custom combination chart (connected scatterplot) with the days delinquent on the primary axis in blue (60+ days delinquent) and the original bankruptcy score on the secondary axis in orange (using TransUnion’s CreditVision Bankruptcy score range 300-850). As a reminder, higher scores equate to less risk with this model. Some of the most delinquent loans in this portfolio below had the lowest bankruptcy scores at origination – which could be a leading indicator of probable delinquency or default into the future.
Example 2: The matrix table below shows the credit utilization tiers (credit in use) along the y-axis and the most recent bankruptcy score buckets along the x-axis. A trend can be observed among the borrowers who have extended the most amount of debt compared to their limits on their open-ended loan, resulting in riskier, lower bankruptcy scores when using TransUnion’s CreditVision Bankruptcy scoring method once again.
Bankruptcy score riddle solved? Most likely not entirely, but hopefully this can spark some thought-provoking conversations and discussions in the future to ponder which score you are using, how better to utilize it, or to possibly embark on the utilization of the risk score if you haven’t used it before. As Oscar Wilde once said, “The true mystery of the world is the visible, not the invisible.”
Cheers to more clarity of the mysterious bankruptcy score!