2/25/2013 6:30 PM ET|
Will credit scores become obsolete?
Card issuers are turning to a wide range of nontraditional factors to evaluate consumers' creditworthiness.
Think your credit card issuer looks only at your income and FICO score when deciding what kind of credit card you deserve? Not anymore.
As millions of Americans recover from the sharpest downturn since the Great Depression, a growing number of credit card issuers are quietly testing new, more comprehensive ways to evaluate customers' creditworthiness.
In many cases, that includes looking at a wide range of nontraditional factors, such as the value of your home, whether or not you have a criminal history, how often you change addresses and what kind of professional license you may hold.
Lenders hope that by supplementing traditional credit scores with nontraditional information, they'll be able to offer more cards to more people -- without getting stiffed the way they did before, experts say.
"Lenders want to grow their business again," says Ankush Tewari, the director of strategy and market planning for LexisNexis RiskView, which offers card issuers alternative credit scores based on information in public records. "They want to open their doors again, but they don't want to repeat the same mistakes they made prior to the recession."
How it began
Before the downturn, issuers grew their businesses by offering cards to nearly anyone who'd take one. Now, after writing off billions of dollars in unpaid loans, they are trying a more selective approach.
"Issuers are using other data sources to make more informed decisions," says Philip Philliou, a New York City-based consultant to card issuers. Nontraditional data, such as payment history on a cellphone or an applicant's frequent use of prepaid cards, "helps the issuer develop a clearer picture of who the cardholder is," he says.
The use of nontraditional data also helps lenders identify people whose traditional FICO scores took a beating during the recession, but who are normally much better at handling credit than their scores would suggest, experts say.
"These are people who actually are a good credit risk," says Tom Johnson, the vice president of business development at Zoot Enterprises, which helps issuers approve applicants for new cards. "They just happened to have lost their jobs during the recession."
Many potential cardholders have sold the homes that were dragging down their finances or have found new jobs, but their credit scores remain stuck in time, Tewari adds. (It takes at least seven years for a negative mark to fall off someone's credit report.)
"Fifteen million consumers had their credit scores (negatively) affected as a result of the recession," Tewari says. "It's been five years now . . . many of them have recovered and moved past those credit difficulties, but their traditional credit score doesn't indicate that."
Experts say that most credit card providers, including the largest issuers, are either using nontraditional data already or actively examining it. "All the issuers out there are looking at better ways of making decisions and lending," Tewari says.
That's especially true now that, per the Credit CARD Act of 2009, issuers can't increase cardholders' interest rates without giving them 45 days' notice, Tewari says, "so that upfront decision is even more important."
Not everyone, however, is convinced that incorporating nontraditional data is the answer.
"From our perspective, the challenge is the comprehensiveness of the data collection," says Dave Bowen, a senior vice president at KeyBank, which is exploring alternative data but currently doesn't use it. "With things like debt instruments, loans, all banks, all credit unions, all finance companies, we're all reporting that very consistently, very thoroughly." So the details that the big three credit bureaus -- Experian, Equifax and TransUnion -- collect are more dependable, he says.
Alternative credit-score providers, by contrast, often collect much less consistent information, such as rental payment history or utility payments, which aren't consistently reported by landlords and utility companies. For example, "there are tens of thousands of small landlords who aren't going to (consistently report their tenants' payment data)," Bowen says.
Consumer advocates also worry that some alternative information may not take into account complex circumstances and, as a result, may actually harm people more than it helps them. "More data is not always necessarily better data," says Chi Chi Wu, a staff lawyer with the National Consumer Law Center, who has testified before Congress about alternative credit reporting.
Sometimes renters, for example, will find that the only way to get a landlord to resolve a legitimate dispute is to legally withhold rent. However, that could seriously harm the renter's credit history if it's reported as a missed payment, she says.
Low-income consumers may also struggle to pay their utilities on time when the weather turns extreme; but if the late payments are reported, their credit may be unintentionally damaged by a service they can't opt out of, Wu says.
"Utilities are different. It's not like a credit card where you have a choice," she says. "Everybody needs heat and light."
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One thing is that there are too many debt collecting compnaies out there putting anything and everything on peoples' credit reports. One company I know of, even went as far as charging off a card than was already charged off the year before. Then it was for way less than the original charge off. And they are out there month after month looking into peoples credit history without the consumers' consent. Banks have to get a written authorization to do this and why is the government letting these debt collection agencies get by with this. Like most of the time they are 4 or 5 so called owners of the debt. Let me clarify something for all you people. Either the debt collection agency bought the or no. If they are the buyers of the account, then they cannot be assignees of an account. An assignee is one to receives the assignement from the a creditor without a sale.
Yes American have a lot of outstanding debt, but it does not mean we aren't going to repay it. It does not mean that we cannot afford to, it means that we cannot start back to work if banks are going to loan money that will help our credit scores look better. Majority of the people having debt problems was caused from 2009. There were too many people willing to give too many credit or way too high of credit. Why would someone give a person who bankrupt on a certain card 4x the amount that was bankrupt on? See. And there is a lot more that is not being told.
I do not trust the Credit Bureaus or their data. I have reported errors in my report and had the bureaus investigate the errors only to be told the information was good. Now how can it be good when creditors re-date debts? That is highly illegal and I've actually written letters to those jerks letting them know if they didn't get it cleaned up, they could be talking to a lawyer.
It is very frusterating that all 3 credit bureaus report different information on a person. They don't report the same information and you never know which one has the good information on you. If there wasn't 3 bureaus and only 1 central credit bureau, life would be easier. Combine the 3 bureaus, combine the workforce, get it to where you can speak to an actual individual. It is not a government agency the way they treat it and you. From what I read, you don't even see the real information that is reported to a possible lender!
Go back to the old days when things were easier. You had to sit down face to face with a banker or lender, could talk to someone at a credit card agency regarding your past issues and not be judged on the past the way it is today! It takes longer then 7 years in some instances to get the negative off your report due to unscrupulous collection agencies re-dating your debt. Unless you call them out on it, it will be resold and resold and resold and re-dated with each sale. That according to federal law is illegal and they could get in major trouble doing this.
I was refused a card. It had 10% discount on purchases. But it did not have one ounce of debt in 30 years.
the credit bureaus are the devil. Truly despicable organizations.
Did you know that merely applying for credit makes your score go down?
Did you know that canceling a credit card makes your score go down?
I used to have a credit score well into the 800s. Now it is in the mid 600s.
Why? I have never been late. I do not have any negative comments.
It is because i started a new small business. Over time I have been trying to find
better interest rates on the start up costs. Just inquiring for credit kills you.
I hate these 3 moronic companies and wish they would go belly up.
One more thing... the credit score you receive when you check your own score is
not the same value that creditors receive when they check you out.
60 minutes just did a story on these crooks. Unbelievable what they reported
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