Credit scoring: About the Gauge 2 score card
The article provides an in-depth view of the TransUnion Gauge 2 scorecard which is used by the NestEgg Decision Engine.
You may find it useful to read the articles on credit scoring, credit profiles and factors driving scores up and down.
Gauge 2 has variations e.g. current accounts, credit cards and personal loans.
NestEgg chose the standard Gauge 2 scorecard because a sample of credit union records showed no measurable uplift in bad debt predictability when an alternative scorecard (e.g. mobile phones) was used. Gauge 2 standard had also been tested with the most consumers.
Good / bad definition
The definition of a ‘bad’ loan is not the same as a write off. A loan can be considered ‘bad’ even if it stays on the lender’s books.
Loans are considered bad if, within 12 months, the bureau data for the borrower shows that a credit account status is 3, 4 ,5 ,6 or D.
Additionally, if the applicant has recently been subject to a County Court Judgement or form of insolvency, this will also create a ‘bad’ status. The CCJ / Insolvency could be issued by ANY creditor, not just the one under consideration for testing a score card.
Data Sample
A random sample of 5m SHARE accounts that were active over a 15-month period was used. The outcome period was 12 months.
On this basis accounts may have been opened over 15 months, but only over the past year were loan statuses taken into account.
Bad / good odds
An applicant with a credit score of more than 770 can still miss repayments on a loan. This could be beyond their control, e.g. loss of job, illness or bereavement.
The question often asked is “what credit score leads to what bad rate?” e.g. if an applicant’s score is e.g. 600 does that mean the bad rate will be e.g. 3%?
The bad / good odds table, above, provides a partial answer to this. There is emerging evidence that credit union bad rates are less than the general population upon which the Gauge 2 scorecard is based. If a loan suggests that the bad rate for the general population is 25%, it does not necessarily translate to a write off of one in four loans for a credit union.
There are a number of reasons for this.
Members with savings may feel that they have a stake in the credit union. Consequently, they are less likely to miss payments. That’s especially the case when savings are held as security. Many members also realise that a credit union is their last opportunity to obtain a loan at a reasonable interest rate. On that basis members want to maintain a line of credit, even if they are missing payments elsewhere.
In the table below a score of 380 gives 1 good loan for every 64 bad ones. A score of 620 gives 64 good loans for one bad one.
The score of 620 provides odds of 1/64. This translates to a bad rate of 1.6%.
A score of 520 gives 1 bad loan for every 2 applications, in other words a bad rate of 50% (2 divided by 1).
A score of 600 provides for 1/32 bad loans, i.e. 3.1% bad rate.
Distribution of scores
The graph below shows how the scores distribute across the population.
2/3 of the UK population have a credit score over 600.
Put another way, based on the odds table above, 66% of adults taking out a loan would have a bad rate of 3.1% or lower.
Credit union average scores vary according to loan purpose and lender. Leisure pursuits and credit card consolidation have scores in the 590 – 610 range. Home improvements tend to have a score of around 540 (which suggests a bad rate of 1/4 or 25%).
NestEgg is undertaking retro (aka vintage) analysis of loan books to establish a better relationship between credit union lending and credit union bad rates. We’ll update this article with our findings.
