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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Credit reports are useless and are forced on consumers by reporting agencies who don't do their jobs accurately. That doesn't matter to them because they need not answer to anyone for their own mistakes on reporting. The article made these points that reflect this.
A) Most scores reflect a lower value than actual rating.
B)Credit scores are "stuck in time" because no one does maintenance to update changes.
C)The big 3 Experian, Equifax, and Trans union have actually used info from social media for reporting????? What info?
D) Reporting agencies can report anything they want and the person reported on has no recourse because they make it difficult to contact them for details. They do not hold themselves accountable nor do the banks or lending institutions have any way to verify if reported info is correct.
This info came from the article....what good are they.
One of the biggest problems I've seen is, especially for large loans (like a Mortgage) they want to see that you have and manage several credit cards before they give you a loan. They say that's because they want to see that you can be responsible with your credit.
I ask, how is it better that I spend money on credit cards, and have payment history, than that I manage my money so well that I don't have to defer payment on the things I buy every day, and thereby have lower total expenses?
If I have paid for food, and gas, and a car, and my insurance, and college, still have nice clothes, have managed to build a savings account, and have $0 in debt through all of that, why am I a worse candidate for a mortgage than someone who has managed credit well, but uses it and has debt that is still being serviced?
I said all that to say this.. It's good to bring it to something more than a number.
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
It's all so much BS. In 2006 or 2007 I went to the bank to see about refinancing my car loan. At that time I had been with my employer for a little over a year, after having been out of work for about a year and a half. I did not want any money from them; I did not even ask for a lower interest rate (although I told them I would not turn down a lower rate, if it were offered); I just wanted to extend the term for a year to lower my monthly payments. Of course (and I was not surprised), the computer turned me down. At the time I was current with all my bills, which were practically nonexistent, and the fact that lowering my payments, which I had managed to make all through my period of being unemployed, would make my ability to repay even more likely, were irrelevant to the computer. It looked at my lousy credit score, due in part to being late with a number of my car payments (among others) when I had been unemployed, and said "no." The loan officer was sympathetic but claimed the computer report tied her hands. Oh well, I continued working and soldiered on for another year and paid off the car loan over a year early. I had already gotten rid of all of my credit cards and bank accounts and that final car payment was the last time I paid a "financial institution" anything.
My credit score still sucks because I haven't had any credit cards, loans, or other credit history since then. In about 2 years (maybe less) even that car loan should be off of my credit history and it should be just a blank slate...which is just what I want: no credit history. This alternative data crap is just that, and an excuse to intrude, unwanted, once again into my life and privacy.
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.
Don't be overly concerned here ... You already know if anyone in the financial industry zeros in on anything they can lock into as an advantage for themselves they will find a way to push it into law ...
However, they can not replace a system controlled by law with one that is not regulated (which would be ideal for them if allowed) ... But will never happen ...
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