Q&A: How cardholder behavior can impact your credit

Hit with a declined transaction? That might affect your lesser-known 'behavior score'

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question

Dear Speaking of Credit
I have a question about credit scores and how they might be affected by a declined charge.

Here is what happened that prompts my question: I recently had to buy new tires for my vehicle, and it was over $500. My credit line is $500 and I tried multiple times to pay using my credit card, until I remembered my credit limit is only $500.

Now it shows up in my recent transactions as declined. My question is, will this affect my credit score?

I have tried searching this on many sites and even asked my credit card company. I have been finding different answers to my question. Some say I will not be affected, and others say I will.

Any clarification on this matter would be great. Thank you. – Tom

Answer

Dear Tom,
Multiple rejections for a charge that would have exceeded your credit limit may or may not affect your credit score. It depends on the type of credit score.

Usually when we speak of credit scores, we mean the “credit bureau risk scores” that rely entirely on credit information from your credit reports at the three national credit bureaus – Equifax, Experian and TransUnion.

FICO and VantageScore are the two biggest purveyors of these scores, used primarily by lenders in their new account decisions and when managing existing accounts.

How credit bureau risk scores work

A credit bureau risk score essentially tells a creditor how good (or bad) of a credit risk you are likely to be, based entirely on the credit account information making up your credit reports, including:

  • Payment history: This typically goes back seven years for late payments and indefinitely for positive information.

  • Account balances and credit limits: This measures the amount you owe and how much of your available credit is being used (utilization ratio) as of the last statement/closing date.

  • Account age: This uses each account’s open date to determine the newest, oldest and average age of your credit accounts.

Fortunately for your situation, since individual purchase (and denial) details don’t appear on your credit report, your FICO and VantageScore should remain unaffected by the repeated rejection of that charge.

Credit behavior scores are different

However, that’s not the end to this story, as another type of credit score may not be so forgiving.

Next to credit bureau risk scores, “behavior scores” are the other kind of credit scores used widely by lenders – especially by credit card issuers – to gauge a customer’s creditworthiness and future profitability.

 

Video: FICO's 5 credit score factors

But unlike the scores based on credit bureau information available to any lender having permissible purpose, behavior scores rely largely on credit transaction information known only to the account issuer and for their use exclusively.

FICO and VantageScore provide a peek into how you manage credit across the broad landscape of your entire credit report. A behavior score is calculated for, and only seen by, one particular creditor using their own information to fine-tune the ongoing management of that account for marketing and risk purposes.

As with credit bureau risk scores, a good behavior score predicts a future filled with healthy credit activity and timely payments for a lender. But unlike the well-known FICO and VantageScore, behavior scores differ with each lender and are not available to consumers.

As such, consumers know little about what makes them tick or, for most people, that they even exist. Yet your behavior scores can directly affect your capacity to charge and the amount of interest you’ll pay.

What is included in behavior scores

While behavior scores weigh some of the same account information that credit bureau risk scores consider – payment history, balance, credit limit and account age, for example – they also consider unique aspects of your credit card behavior that don’t find their way to your credit report, such as:

  • The types of businesses you frequent, the amount you spend at each, and how often you shop with the card.

  • Whether you are a “revolver” who carries a balance with interest from month to month, or a “transactor” who pays in full within the monthly grace period.

  • The denial of a credit limit increase request or, as you experienced, a rejected purchase due to the credit limit being too low.

How behavior scores can affect your credit

In practice, behavior scores tend to be used in conjunction with credit bureau risk scores to:

  • Set the date and amount for the next automatic credit limit increase.

  • Make a 0 percent APR balance transfer offer or other promotion.

  • Offer a lender’s other credit products or special discounts to targeted customers.

So, despite your FICO and VantageScore remaining unaffected by the rejection of that tire purchase, your behavior score with the card company that denied the charge may not be unscathed.

If considered a red flag for higher risk in the scoring formula, such an incident could cause you to miss out on a future limit increase, balance transfer or other offer.

How to boost your scores

On the brighter side, any type of credit score will give recently occurring events – good or bad – more importance than older ones. 

This can mean that, showing some good credit behavior moving forward, you could start seeing more of those credit limit increases and promotional offers only available to consumers with good credit bureau risk and behavior scores.

But here’s a key difference: Only your card issuer knows of your unintentional attempt to max out the card. That means your behavior score with your own lender is likely hurt, and the best offers will come from other lenders, which are unaware of your accidental transgression.

All you have to do is avoid trying to charge more than your credit limit will allow, and continue paying on time each month. Good luck!

See related: Banks’ internal “behavior scores” can decide cardhlder terms, Over 40 and over 800: seasoned credit score achievers

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Updated: 11-17-2017