2/21/2014 3:45 PM ET|
How lenders use your secret credit score
More lenders are using big data to judge if they should extend credit to you.
Is the National Security Agency really tapping your phone calls and reading your email? If they are – in spite of the invasion of privacy concerns – the truth is, it's probably some pretty boring stuff they're snooping in on: "Want to meet for lunch?" "Justin Bieber got arrested?" "Who's the new guy in accounting?" That sort of stuff.
The real data that matters is much more personal. Lenders use it, and you should know about it. It's your hidden credit score.
Lenders easing credit standards
After years of suffering, consumer credit is gaining giant momentum. Crawling out from the rubble of recession, lenders are looking to make deals.
The "too big to fail" banks have been mopping up lingering legal messes, and the mortgage industry is still in recovery. But consumer-focused lenders have been easing credit standards and swimming downstream to gain retail customers and pump up profit margins.
These mostly smaller lenders are finding a good deal of opportunity with consumers who have less-than-perfect credit. But they don't depend solely on your traditional credit score. They need more than that.
The term "subprime" has become synonymous with the U.S. financial crisis of 2008. Tied to the manic mortgage industry that fueled the economy in the early 2000s, subprime loans were packaged as derivative investments and ultimately caused the collapse of the house of cards that was the American economy.
But subprime lending – issuing loans to consumers with FICO credit scores of 660 or below – is making a comeback. And rather than causing concern for another crisis, it's helping credit-critical consumers rebound from the recession.
- Also from U.S. News & World Report: 7 easy steps to pay off debt
It's also feeding the heat of a resurgent automobile industry. The credit bureau Equifax reports that auto loan volume was at an eight-year high last year, and nearly a third of those loans were issued to subprime borrowers.
For Americans with complicated credit histories, the opportunity for a financial reboot should continue for awhile longer. Moody's Investors Service says subprime borrowers can expect the favorable lending environment to continue through at least the end of 2014.
Alternative credit data
How are lenders managing credit risk when dealing with consumers with low credit scores? It's all a function of big data – the term given to the collection and interpretation of a multitude of data gathered from a variety of sources.
In effect, it's a hidden credit score, built upon a "predictive risk" rating generated from non-traditional payment histories. That means rather than simply examining typical revolving credit accounts and personal loan histories, lenders are looking at payment behavior tied to cellphone, landline, utility and cable and satellite TV payments.
This data provides insight into millions of consumers with "thin files" – meaning potential borrowers with little, no or recovering credit histories. In fact, a reported 25 million consumers are nowhere to be found in traditional credit files, according to Equifax. Alternative credit information allows lenders to serve this previously untapped market.
Credit reporting agencies know more about us than most consumers would believe – from income information and your home address, to public records and wealth profiles. All this information serves to develop our credit risk rating that is provided to subprime lenders, and it is driving the credit-bruised consumer lending boom. As privacy intrusive as the practice may seem, it can work to your advantage.
An excellent time to repair your credit
With relaxed credit standards and motivated lenders using alternative data to close a deal, Americans who have seen their credit ratings sag can use this rare opportunity to restore their credit score.
- Also from U.S. News & World Report: Do's and don'ts for building a solid credit history
Making a sensible purchase in this easy-credit environment will allow you to begin rebuilding a positive credit history. Timely payments, combined with careful management of your debt load, will help your credit score rebound. It takes time, but most of us don't need to overload our credit capacity anyway.
Knowing the information is out there can give your credit file a counter-intelligence edge.
More from U.S. News & World Report
VIDEO ON MSN MONEY
Propaganda at its finest. The cause of the crash was the greedy, corrupt aholes on Wall Street and in the banking industry who packaged and sold (translation-deliberately unloaded) the loans as "viable investments" when in fact they knew from the start that they were absolute junk.
There is a bit of misinformation in this article from MSN Money. The author wrote: "But subprime lending – issuing loans to consumers with FICO credit scores of 660 or below – is making a comeback."
Sub-Prime lending does not describe those borrowers with credit scores less than 660. Period. Before sub-prime was the flavor of the day, lenders routinely made loans to these borrowers. In today's post-apocalyptic sub-prime collapse, lenders still do and trust me, they're not labeled or treated as "sub-prime". Sub-prime, as it existed from the '90's to 2007, allowed for 100% (and higher) LTVs with stated income and assets. In fact, there was little attempt to even verify a borrower had a job or if the stated income was reasonable for the borrower's profession or job title. There were 100% LTV loans available for borrowers who didn't have to indicate any job or banking info. Is it any wonder why such loans created havoc in our economy once values dropped? The incredible # of years of increasing property values that the industry relied upon to justify making sub-prime loans in the first place wasn't sustainable. Those loans failed because there was no integrity in the file...nothing to hang their hats on....just a wink and a nod with a "I promise I'll pay you back...probably" attitude.
A score of 660 may or may NOT be an indicator that a borrower is a poor credit risk. It is a snapshot in time...subject to big changes with even small changes in a borrower's credit profile. It's true that statistically, a borrower with a lower score will default at a higher rate than a borrower with a score over 660. But a borrower with a score less than 660 is still an excellent credit risk. It is what is found in the credit report that makes all the difference.
A borrower who co-signed for a family member's car loan will see a plunge in his score if the family member makes payment late one month. A borrower who moved and experienced mail delay may find herself with a collection account for a past-due final month water bill of $32. Crazy enough, a borrower who filed BK a year ago may have a high credit score. Buy a new car? Watch your score plummet. And don't forget that a borrower with just a couple of accounts can point to his very respectably high credit score of 750. Does that score overcome his shallow credit? Of course not. Is he a better risk because his score is over 660? Again, of course not.
FNMA, FHLMC, FHA, VA, & USDA all lend to borrowers with credit scores less than 660. The reason they do is because there is adequate info and documentation in the loan files to give the underwriter confidence in the borrower's ability to repay. Knowing how much a borrower makes and validating that documentation along with a careful review of credit and liquid assets is the norm in today's lending world. It was the norm before the sub-prime debacle and should be the way lending continues. The credit score is but one component in a lender's credit decision.
A credit score of 660 does not classify a borrower as "sub-prime"...it just means additional scrutiny needs to be made before granting the loan.
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