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Can Bad Debt Be Good?

Charged-off debts to third parties - sold-derogatory loans in credit speak - leave a huge black mark on the credit histories of consumers. But should they? VantageScore looked at 4.3 million consumers and said not so much.

In its latest white paper, "Impact of Sold-Derogatory Trade Lines on VantageScore 3.0 Credit Scores,"  VantageScore Solutions revealed the results of its investigation to determine if the removal of the charge-off data associated with sold-derogatory accounts, or sold-derogs as they are known in the credit industry, can significantly impact a consumer credit score.

After hearing consumer complaints stating that sold-derogatory trade lines (ie, severely delayed debts sold to third-party agencies for collection) were still showing up on credit files even after being discharged through bankruptcy, many lenders began to question the ways in which they were reporting sold-derogs to the national credit reporting companies (CRCs).

Some lenders even considered eliminating sold-derog accounts entirely from their reporting, but at the same time had concerns that excluding this information could adversely affect the accuracy of credit scoring.

After conducting a study within a sample of 4.3 million consumers, who were randomly and anonymously selected from one of the three major credit bureaus, VantageScore Solutions found that removing sold-derogatory debts from consumer credit files did not cause significant impact to consumers' VantageScore 3.0 credit scores.

According to VantageScore Solutions' research, removal of sold-derogatory trade lines from a consumer credit file caused little to no change in the consumer's VantageScore 3.0 credit score. In fact, the majority (59.3 percent) of randomly selected consumers saw no score change, and an additional 28 percent experienced a difference of just 1 to 20 points.

The paper noted that 4.9 percent of consumers showed at least one sold-derogatory trade line on their credit file, and that an overwhelming majority of consumers with sold-derogatory trade lines also showed collection trade lines, indicating "a strong probability that the [sold-derog] trade line is also reflected as a collection trade line."

"We tested VantageScore 3.0 against various factors, and found that sold-derogs have minimal impact on a credit score," said Sarah Davies, SVP for analytics, product management and research at VantageScore Solutions, in a press release announcing the release of the white paper.

"The results speak for themselves: By removing these data from the calculation of a consumer's credit score, it does not materially impact the predictiveness of that score," Davies added.

VantageScore Solutions explained that lenders can be confident with the risk assessment associated with VantageScore 3.0, due to its investigation proving that even if sold-derogatory trade lines were universally removed from credit files, the impact on credit scores would remain marginal.

To download the white paper, click here.