Why your traditional credit score is becoming obsolete
In race to compete, issuers dig deeper into who you are and how you live
Think your credit card issuer only looks at your
income and FICO score when deciding what kind of credit card you deserve? Not
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'
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, say experts.
"Lenders want to grow their business again," says
Ankush Tewari, director of strategy and market planning for LexisNexis RiskView,
which offers card issuers alternative credit scores based on public records
information. "They want to open their doors again, but they don't want to
repeat the same mistakes they made prior to the recession."
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, say experts.
"These are people who actually are a good credit
risk," says Tom Johnson, 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 found new jobs, but their credit scores
remain stuck in time, adds LexisNexis's Tewari. (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," says Tewari. "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."
say that most credit card providers, including the largest issuers, are either
using nontraditional data already or are actively examining it.
HOW TO MONITOR YOUR
NONTRADITIONAL CREDIT INFO
You can get a free copy of each of your traditional credit reports from the traditional big three credit reporting bureaus by logging onto AnnualCreditReport.com.
Ordering your specialty reports is a little trickier. "You have to go directly to the companies," says the National Consumer Law Center’s Chi Chi Wu.
To find out which companies may be collecting your financial minutiae, check out the Consumer Financial Protection Bureau's list of 42 consumer reporting companies.
The list contains phone numbers and websites for each agency. However, you will have to check each agency's website to get instructions for ordering your free annual file disclosure.
Some agencies will allow you to pull your report online. Others require that you call an 800-number or mail in your request.
"All the issuers out there are looking at better
ways of making decisions and lending," says Tewari.
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' advance notice, says Tewari. "So that upfront decision is even
more important," he says.
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, senior vice president
at KeyBank, which is actively 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 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]," 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, says Wu.
"Utilities are different. It's not like a credit
card where you have a choice," says Wu. "Everybody needs heat and light."
of agencies collect consumer information
a list intended for consumers, the Consumer Financial Protection Bureau (CFPB) cites
39 consumer reporting agencies that collect alternative data, but admits the
list isn't exhaustive.
Lenders want to grow their business again.
|-- Ankush Tewari
Most consumer reporting companies specialize in a
specific type of information mining. For example, LexisNexis RiskView collects mostly
public records information, including insights into your age and education, how
often you move, whether you hold some kind of professional license and what
kind of home you live in.
"Any data that's available through a courthouse, for
example, bankruptcy data or criminal data, or data that's available from the
county ... all that stuff is public information," says LexisNexis's Tewari.
Big three credit reporting company Experian collects
data on rental payments, but only includes positive rental information on credit reports. Clarity Services specializes in reporting your
payday loan and check cashing history, among other financial activities, and ID
Analytics pulls together the identifying information you use when applying for
other loans, such as your name, address and phone number.
Some companies even collect social media data, but
many experts are doubtful that information will become widely used for credit
scores that are crunched by a computer rather than by hand. "From an individual
perspective, it's really hard to gather any tangible meaning" from social
media, says Zoot Enterprise's Johnson. "Computers just don't get context very
Who are these guys? It's not clear
unclear how many of the consumer reporting companies listed by the CFPB are
selling reports or scores specifically to credit card issuers -- or who else
may be selling this kind of data.
However, consumer advocates say that the dearth of comprehensive,
publicly available information about who these companies are and what kind of
role they play in credit decisions is a problem for consumers.
"A lot of times people don't even know what these
companies are," says Linda Sherry, a spokeswoman for the nonprofit consumer
rights group Consumer Action.
Under the Fair Credit Reporting Act, consumers have
a right to request a free copy of their alternative reports. However, some
companies make it so difficult to do so that the CFPB recently sent them a
stern warning. Others won't disclose the information being reported until a
consumer has received an adverse action notice after they've been rejected for
More data is not always necessarily better data.
|-- Chi Chi Wu
National Consumer Law Center
That, too, is problematic, say consumer advocates --
especially since errors on a consumer's report could carry such hefty
"Any time data about consumers is used and they have
no way to correct it or ensure it's accurate, that's unfair to consumers," says
Consumer Action's Sherry.
Consumers can request a free annual report by
contacting the company directly and asking for their file disclosure. However,
each company requires a different process for disclosing information, warn
consumer advocates. Some companies will allow consumers to request a report
online. Others require that consumers call or mail in their request.
also look within for extra data
parties aren't the only sources of information that issuers are looking to for
alternative data, however. They are also increasingly looking at the data they
already own, say experts.
That's especially true when it comes to consumers
with the best credit scores. Since the recession, issuers have competed
fiercely for cardholders with pristine credit, most of whom already have a
fistful of cards.
To lure these cardholders into applying for additional
credit, many issuers are testing fresh ways to use the data they already have
to personalize offers and encourage cardholders to spend, says Zoot
"We're being asked more and more to help them use
their own data better," says Johnson. That includes analyzing what items you
buy with the cards you already own, how often you use them and what kind of
banking method you prefer.
The goal, says Johnson, is use those details to offer
you a card you're not only likely to apply for, but that you will also
"The competition is driving some really innovative
practices," says Johnson. "These banks are having to deal with customers on a whole new
For example, if you're a frequent spender with an
enviable credit score, issuers may tailor the rewards they offer you based on
the purchases you frequently make. Or they may grant you a higher credit line
or lower APR
based on internal information in conjunction with your traditional
and nontraditional scores.
have some very interesting data, some very good data," says Johnson. And
"they're just starting to realize the value of it."
See related: FICO introduces new mortgage credit score
Published: January 29, 2013