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Credit scorers find new ways to judge you
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Jane J. Kim
The Wall Street Journal http://online.wsj.com
Mar. 11, 2008 08:48 AM
Don't be surprised if a lender wants to know if you pay your rent on time or bounce checks before it will let you borrow money.
For many years, loan approvals were determined largely by borrowers' credit scores, which are based on proprietary formulas that include such things as debt levels and loan-payment histories.
Now, lenders increasingly are looking at other factors, such as rent and utility payments, to determine whether potential borrowers will make good on their loans. The financial-services industry began this push so it could lend more to the estimated 50 million Americans - including many immigrants, young adults and seniors - with little or no credit history. But as the economy slows and default rates soar for home mortgages, more lenders are using these same tools to evaluate the credit-worthiness of the broader population.
Today, credit bureau Experian Group Ltd. plans to announce an alternative credit score to help lenders get a better picture of how people with little or no credit might handle a loan. Competitor TransUnion LLC rolled out a similar product this past summer, while Fair Isaac Corp., developer of the widely used FICO score, broadened its Expansion scoring system in November to include more information about monthly rent and utility payments, among other data.
Before the subprime-mortgage crisis, most lenders used the Expansion score to get more business, says Tom Quinn, vice president of global scoring solutions at Fair Isaac. "Now, we are seeing more lenders interested in using this as an additional tool to mitigate the risk in their portfolios - for people in the gray zone' or just to do a safety check," he says. Banking giant Wachovia Corp., for example, is using an alternative credit-scoring system from Atlanta-based L2C Inc. to assess the credit risk of its credit-card customers.
All this means that consumers should pay closer attention to whether they pay bills on time or write bad checks. More lenders will study such factors when they price loans or reset credit lines on existing customers, particularly those with lower credit scores, says Arjan Schutte, associate director at the Center for Financial Services Innovation, a nonprofit Chicago affiliate of ShoreBank Corp. that provides advisory services to the financial-services industry.
Yet the new scores could be good news for those who pay their bills promptly but don't have established credit histories. In the past, banks often ignored this group because they had no way of evaluating the risk. The Center for Financial Services Innovation estimates this group could generate between $6 billion and $45 billion in new loans each year.
"The knee-jerk reaction is that the credit-underserved consumer group is overwhelmingly subprime," says Mr. Schutte. But those consumers present a similar range of risk as those with traditional credit scores, he says.
The alternative scores developed by the credit bureaus and other financial-services firms rely on a combination of their own data, as well as third-party databases. TransUnion and Experian have teamed up, respectively, with L2C and eBureau LLC, which specialize in collecting and analyzing alternative payment data. Equifax Inc.'s MarketMax score, meanwhile, pulls information from electronic database LexisNexis to verify consumers' identities and sift through public records for tax liens, bankruptcies or criminal records, in addition to using other data.
When Rich McEldowney of Bozeman, Mont., and his wife, Phoebe, applied for a mortgage in February 2007, their mortgage broker told them that his wife didn't have a credit score anymore. Among the reasons: They had paid off their auto loan several years ago, and she didn't have any credit cards. In fact, except for a credit card that Mr. McEldowney uses for his job as an ecologist, he and his wife don't use credit cards, preferring instead to use their debit cards and pay for things with cash or checks.
"It seems like the more debt you have, the easier it is to get credit," says Mr. McEldowney. "We don't have credit cards, and we try to be responsible with our debt."
On their broker's suggestion, they turned to Pay Rent, Build Credit Inc., also known as PRBC, a credit bureau in Annapolis, Md., that specializes in collecting rental and bill-payment data. It studied Ms. McEldowney's history of paying other household bills - such as rent, telephone, and auto insurance and her daughter's day-care bills.
She ultimately received a decent credit score. As a result, the McEldowneys were able to qualify for a 6.5 percent rate on a $350,000 mortgage - roughly half a percentage point lower than the rate that Mr. McEldowney says he would have been able to get on his own.
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Remember ... Don't spend a PENNY 'til you call JENNY!
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New Credit-Scoring System
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Family Finance: Credit Bureaus Create Single Rating
VantageScore to Streamline Process but Doesn't Improve Consumer Data Reliability
By M.P. McQueen, The Wall Street Journal, Mar 15, 2006
Credit-bureau officials said the VantageScore would "simplify" and enhance the credit process for consumers and credit grantors. But consumer advocates and others said the new system, which brings to at least five the number of credit scores that consumers can buy directly, would as likely confuse consumers as simplify the credit process, at least in the short term. They also said the new scoring system doesn't eliminate the credit-rating system's main problem: the reliability of consumer data on file with the credit bureaus. |
There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. Double check the "high credit limit,"'total loan," and 'past due" columns.
It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.
CREDIT REPORTING COMPANIES
Free Annual Credit Reports
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems. See The Guide to Disputing.
A credit bureau score is a number, based upon your credit history, that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details. See Credit Reporting 101.
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford. See The Truth About Credit Repair.
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Important information from the Federal Trade Commission, the nation’s consumer protection agency: www.annualcreditreport.com is the ONLY authorized online source for you to get a free credit report under federal law.
You can get a free report from each of the three national credit reporting companies every 12 months. Some other sites claim to offer "free" credit reports, but may charge you for another product if you accept a "free" report. |
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