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June 2010

Have you heard of the National Risk Score?

Recently I spoke at a Realtor meeting and I was asked to write about the "National Risk Score" (NRS). Some Realtors use this score when evaluating credit for Landlords who are approving tenants for rental properties.

Most consumers and professionals don't realize just how many scores are out there. Experian created this score and has many others it offers to varying types of businesses depending on their goals.

In regards to the NRS, Experian claims the score is easy to understand since it's range is from 0-1000. The lower the score the LOWER the risk. This is the opposite of all the scores most of us work with to date. Right now if you have an 800 Fico score you are the top tier and deserve the lowest risk rates and most favorable view from any Landlord or Lender. If you had an 800 score with the "NRS" you would have an 80% chance of default in the next 24 months! This is very high and would therefore make you a terrible risk. Most likely, you would be turned down for any financing or approval on a lease. It would be like having a 459 Fico Score.

To come up with the most accurate "predictive characteristics," Experian evaluated 100's and 1000's of credit profiles over a 2 year period. Some features of the score are predicting the probability of derogatory credit patterns including charge offs, repo's, foreclosures, collections and bankruptcies. It uses eight score cards based on past credit profiles that include amount of credit history, length of credit history, and past payment performance. The score is based on a 24 month performance period and ranges from 0-1000 (there is an option to have the score formulated to be compatible with current scores and put into a 360-840 score range if chosen). The score gives a numeric value for each consumer which represents their risk level.

The NRS not only gives a score but it also flags high risk accounts so Landlords and Lenders could look more deeply into the consumer's history. The score is also geared to Companies that are combing through consumers to find prospects. It claims, "by using multiple scorecard technology further enhances the model's predictive power. This state-of-the-art technology segments prospects into groups having similar credit histories. Scores are calculated from scorecards developed specifically for each group. This allows detailed analysis of the predictive variables that vary among subpopulations and enables more accurate credit evaluation." This means the score groups consumers with similar credit histories and then calculates from "scorecards" that are developed specifically for each group. This scorecard aspect seems to be used most for organizations that are looking for specific prospects. From what I read the score is popular in the use of marketing as well.

In studying the NRS I found that Experian believes this score makes discrimination highly unlikely. This is how they put it: "With the National Risk Model, you can consistently make objective credit decisions. Because the model was empirically and statistically derived from a random sample of credit histories, your chance of making discriminatory decisions is reduced." This makes sense for Landlords when deciding on a potential tenant application. The laws are clear that discrimination could cost a Landlord dearly so the choice to use a score like this has its merits.

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