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 Credit reports now show if you regularly pay your credit cards in
full every month - making you a low-risk "transactor" - or if you
are a higher-risk "revolver" who carries a balance.
Some lenders use the information to determine what types of credit
cards and loans to market to people, while others are starting to
use the distinctions in decisions about whether to grant credit at
all, as well as what rates and terms to offer.
Fannie Mae said on Monday it would require mortgage lenders to use
this so-called "trended credit data" in loan decisions started in
mid-2016. The change could help people with lower credit scores
secure mortgages if they have a history of paying off their cards.
Separating transactors from revolvers has become "the hot credit
report attribute du jour" for lenders and researchers, said credit
expert John Ulzheimer, who has worked for credit scoring company
FICO and credit bureau Equifax.
Lenders are constantly looking for better ways to assess risk, and
payment trend data seems to offer insights that traditional credit
scoring models do not, said Alex Johnson, senior analyst for
Mercator Advisory Group, a payment and banking industry consultant.
"I would be surprised if there were any large banks that aren't
actively evaluating how to use this information," Johnson said.
"This data tells a much richer story, because you can see the trends
over time."
That is in contrast to the credit scores currently used in most
lending decisions, which do not distinguish between people who carry
balances on credit cards and those who pay them off. The latest
versions of the leading FICO credit scoring formula and its main
rival, the VantageScore, do not incorporate payment trend data,
those companies confirmed.
The three major credit bureaus Equifax, Experian and TransUnion,
added payment patterns to credit reports two to three years ago, and
researchers soon discovered that the differences in payment patterns
are "very predictive" in determining who will default, Ulzheimer
said.
"Revolvers are many times riskier," Ulzheimer said. "It makes a huge
difference."
Revolvers are three times more likely to default on new credit cards
and auto loans than transactors, and five times more likely to
default on current cards, a study by credit bureau TransUnion found.
"Partial" payers - those who actively pay down their balances - are
typically less risky than "minimum" payers who pay only what they're
required to pay each month, a follow-up TransUnion study found.
Credit bureau Experian has incorporated payment trend data in its
Trended Solutions products to help lenders spot risk and more
precisely target borrowers with credit card offers based on their
behavior over time, said Paul DeSaulniers, Experian senior director
for risk scoring and trended data solutions.
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Equifax has a similar product called Dimensions.
TransUnion, meanwhile, sells lenders a product called CreditVision
that lenders have started using for credit decisions as well as
marketing, said Mike Mondelli, senior vice president of TransUnion
Alternative Data Services. All three bureaus also sell payment
pattern data to lenders who create their own custom scores.
TransUnion recently introduced a second version of its product,
called CreditVision Link, that also factors in alternative
non-credit data such as checking accounts, address changes and
magazine subscriptions to identify people who may be good credit
risks but who are overlooked or downgraded by traditional formulas.
Using payment patterns and alternative data, the formula identified
23 million people as "prime" or "near prime" - that is, good risks -
who were categorized as "nonprime" or not good risks under
traditional credit scores, Mondelli said.
Both CreditVision products look at payments and balance data over 30
months, rather than a one-month snapshot, to determine if carrying a
large balance is an anomaly. The formula also adds points to scores
for consistently responsible payment patterns over an 82 month time
horizon, compared to 48 months in traditional scores.
A lender may have a credit score cutoff of 660, for example, which
would mean someone with a traditional score of 659 would be turned
down, Mondelli said. But the CreditVision score may add a few points
for regularly paying off or paying down credit card balances.
If your score is boosted to 665, you get approved. If you're boosted
well above the cutoff, "you may get a better offer" such as a lower
interest rate, Mondelli said.
Using payment patterns this way is not the norm yet. But Mondelli
predicted most if not all lenders would soon be adopting it as a
best practice.
"It's becoming much more mainstream," said Mike Mondelli "Clearly
there's value in looking deeper."
(Editing by Beth Pinsker, Andrew Hay and David Gregorio)
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