Lenders look beyond credit scores
Defaults by high-scoring borrowers spur lenders to look at a lot more of your personal financial data.
We've known for years that lending institutions paid great attention to our credit scores. But the fact that people with perfect credit are among those defaulting on mortgages has made lenders look for new ways to judge potential borrowers.
That could be good news or bad news for consumers, depending on how they handle their financial lives -- or how well their asssets are holding up.
For example, Ken Lin, CEO of Credit Karma, was turned down for a credit card despite a good credit score, Karen Blumenthal reported in The Wall Street Journal in an article titled "New ways bankers are spying on you." Lin's problem? The value of his house was declining but his mortgage balance, on an interest-only loan, was not. Post continues after video.
Credit scoring agencies are changing their models to match changes in consumer behavior that have come with the housing bust, recession and high unemployment, columnist Kenneth R. Harney writes in The Washington Post. He interviewed Sarah Davies, VantageScore's senior vice president for analytics and research, about the "significant change in consumer credit repayment behavior." Harney explains:
Not only are borrowers who previously were rated outstanding credit risks far more likely to default today, she said, but many homeowners are defying long-standing credit industry assumptions by going delinquent on their first mortgage payments while simultaneously continuing to pay their credit card balances and second mortgages on time. Strategic defaults -- walkaways -- by high-score borrowers also have been an unexpected and shocking development, she said.
According to the WSJ, here are some of the things lenders are looking at:
- Bank activity. Fair Isaac, the creator of the FICO score, has developed what it calls "bank-depositor behavior scores," which looks at balances, deposits and withdrawals. Stop your direct deposit? Maybe it means you lost your job and are a greater credit risk, even though you haven't missed a payment on any of your bills.
- Income. Credit bureaus are estimating your income by looking at your credit lines and the amount and age of your mortgage. Earlier this year, the Federal Reserve began allowing lenders to use those estimates to determine whether credit-card applicants have the ability to pay their debts.
- Rent payments. The credit bureau Experian has bought RentBureau, which collects rent payment data from large management companies and plans to integrate that data into credit reports. That may help people who have thin credit histories, if they pay their rent on time. Previously, rent payments haven't been part of credit scores.
- Changes in financial status. Collection agencies and creditors want to know if a debtor's financial pictures has changed, for better or worse. Credit bureaus are reporting changes such as a new job or a drop in credit use -- which might mean you have more money available to pay. (We think this also could indicate you're trying to live within your means.)
- Home value. Having lenders look at this might benefit someone who owns a home outright but hurt someone in states where real estate values have dropped 50% or more.
- Assets. This previously hasn't been part of credit records, but Equifax, another credit reporting agency, is now including estimates of liquid assets with its information.
There have always been complaints that credit scores didn't present a complete pictures of applicants' financial lives, especially for people who don’t use credit much. Lenders and credit reporting agencies didn't listen -- until the recession. As Time Magazine reported last year:
Consumer advocates have long complained that credit scores inaccurately measure borrowers' ability to pay back a loan and therefore make it more expensive or even impossible for people who have a low score, or none at all, to borrow. But the complaints about credit scores have fallen mostly on deaf ears in the lending industry. That seems to be changing.
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