It’s no secret that lenders use our credit scores to evaluate whether we’re worthy of their offers for credit. We assume it extends only to a brief moment of time, when we submit a credit application, and our credit scores are pulled, reviewed and then a decision is made. It might have been that way in years past, but those days are long gone. You’ll be surprised at just how closely creditors are looking at our credit histories.
Not only that, but expect to see a major shift in the credit decision making processes or lenders in the coming months. Here’s why.
We’ve lamented in the past about the reality of fewer consumers having strong enough credit scores for credit cards, bank loans and mortgages. This is all due to the 2008 recession that was also the sharpest economic downturn since the Great Depression. Banks and credit card companies are well aware of this, but what they had yet to discern was whether or not consumers would be able to find their way back. We predicted that many would begin considering new algorithms for their creditworthiness determinations. After all, millions took big hits to their credit ratings due to job losses, foreclosures and all of the lingering problems that come with long term recessions. Suddenly, creditors and lenders were with far fewer borrowers. As a result, there is now a growing number of credit card issuers are quietly testing new and much more comprehensive ways to evaluate customers’ creditworthiness. To say they’ve have to be a bit creative is an understatement.
With many consumers, creditors are really having to bring in a wide range of nontraditional considerations. Those might include whether or not an applicant has a criminal history, whether he’s been at his current address for a specific amount of time, how many jobs he’s held down in the past few years, any professional licenses – nursing, CDL, cosmetology – any kind of license that will help secure a better employment outlook is fair game. The goal is to supplement their traditional efforts with these other considerations in order to paint a more complete picture that tells the tale. The fact is, many credit card companies know that while our credit scores are strong indicators for whether or not we’ll repay our debts. What they’ve learned over the past few years is that sometimes extenuating circumstances paint a far different picture. It’s entirely likely that a couple who had credit scores in the 700s in 2009 could very well have scores in the 500 range today. A few tough breaks and suddenly, even the best prepared find themselves cornered.
Lenders want to grow their business again,
says Ankush Tewari, the director of strategy and market planning for LexisNexis RiskView. They want to begin lending again, but not only are their options limited, many felt the formulas that were being used before the recession were already on their way of becoming antiquated. Some might say the timing was perfect.
There are also new “Behavior Scores” that are being tested.
They’re considered unofficial, though it appears many credit card companies are indeed incorporating these factors into their methods. It tends to be more of a psychological peek into your buying habits.
If you shop at custom boutiques, are willing to buy on a whim without waiting for a sale and you’re able to pay your credit card balance each month, lenders assume you’re doing well from a financial standpoint. But what happens if you begin hitting the clearance racks at a discount store and you’re only making your minimum payments? Lenders could – and likely will – use this behavior data as an indicator that you have become higher risk. The next step it will possibly take is one that lessens its risk. That means you might receive a notice that you’re credit line has been decreased. And it’s legal. Even if your spending and payment habits don’t change, the lender can begin sending special offers as incentives to get you to swipe your credit card more often. It’s all part of the new behavior scoring models lenders are using. If it sounds like this would be something a pair of human eyes would have to plunder through to spot the trends, you’re right. That means someone other than yourself is monitoring your credit probably more closely than you are.
Ah – but there’s another behavior credit card companies are moving forward with, known as the Attrition Score model. This means that if your card company notices you’ve applied for a new credit card, it might be that you begin receiving bonuses with the goal of keeping you loyal. Tewari says it’s the card network’s way of “sweetening the pot with various perks to keep you happy and committed”. You can certainly use this to your advantage. If it appears your current credit card company is reminding you of its existence, it could be time for you to make a phone call and request a lower APR. You just night be surprised at how willing your card company is.
Next up is the Revenue Score. This is what FICO might use to woo those consumers who have the potential to be fantastic consumers. They might discover you graduated top of the class and you land a great job at the impossible-to-access law firm. While that kind of information might not be included on your credit score, remember, there are actual human eyes that are researching consumers and who are looking for those little nuggets of information. You might find yourself being romanced by your credit card company or bank.
Just as efforts are being made to pluck the strong credit risks from the pile, there are also efforts looking to see who might be nearing bankruptcy. This Bankruptcy Score is a formula that predicts – with an impressive amount of accuracy, by the way – how likely you are to file bankruptcy. Interestingly enough, those who have a bankruptcy in the past few years are going to do well in this aspect as lenders know you won’t be legally able to do so again for several years.
In short, lenders have finally come to accept the inevitable – the old ways of determining who is and is not a good credit risk are outdated. They’re shuffling things to ensure they’re in better tune with their customers and would-be customers. This could be good for those looking to pick up the pieces of their credit history.
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