Don’t Get Sandbagged: Here’s Where the “New Credit Scorers” Are Watching You
Personal_Finance / Credit Cards & Scoring Apr 10, 2015 - 09:29 AM GMTBy: Money_Morning
Shah Gilani writes: In our talks here over the last week or so, we’ve been focusing our attention on so-called “Disruptors” – the catalysts of change that are impacting everything we do.
And one particular point that I made underscores just how wide-ranging these Disruptor-driven changes really are.
As I told you all last week, Disruptors are already changing how we communicate (smartphones), how we date (Match.com, eHarmony), how we mate (Tinder… or so I’ve heard), what we eat (genetically modified and so-called “super foods”), how we work (Monster.com, Jobr), how we get heat, cooling and light (fracking), how we get around (Uber and Tesla), how we get where we’re going (GPS) – and where we stay once we get there (Airbnb).
And tucked behind each one of these changes is a major opportunity to make money – and often an opportunity to turn life to your own advantage.
Here’s just such an opportunity: In the area of lending and borrowing, there are ways to “fix” your credit – or to develop a credit score if you’ve never had one.
And that’s the Disruptor secret I’m going to share with you today…
Forewarned Is Forearmed
One of the new developments in this slice of the credit market is this: New credit-scoring companies now provide nontraditional, credit-related data models to lending Disruptors. They’re also selling their new credit-scoring methodologies to traditional lenders – like banks.
Because lending Disruptors increasingly rely on new credit-scoring metrics to make loans easier and faster to get, established credit-scorers, like Fair Isaac Corp. (NYSE: FICO) – better known as FICO – are being forced to develop new scoring systems. That’s so their bank, mortgage and auto finance clients can compete with the “new” vanguard of credit-market players that are turning the lending market on its head.
These are the players we refer to as the “Lending Disruptors.”
What you need to understand is that many things you previously disregarded, or viewed as irrelevant, now matter a great deal.
In fact, the old maxim “It’s what you don’t know that can hurt you most” really applies here: These days, not knowing what increasingly will be used to calculate creditworthiness – the “new credit scores” – can lead to a self-inflicted borrowing wound.
In the good old days (or bad old days, depending on your perspective), credit scores were almost entirely based on such metrics as how much credit-card debt you had and your record of repayment, how you financed your car or education, your track record with your mortgage, and whether or not you had a tendency to make debt payments late or skipped them altogether.
Banks and traditional lenders mostly rely on FICO consumer credit risk scores as the most important metric in a consumer’s creditworthiness toolbox. That’s because FICO scores reflect loan amounts and payment histories on credit cards, mortgages, cars, student loans and personal borrowings – data that’s all submitted to, and modeled by, FICO.
The Game Changers
In the “traditional” market, FICO is pervasive: Fully 90% of U.S. banks in the United States make loan decisions using this credit scoring system.
But that’s changing.
New credit-scoring companies like VantageScore – a joint venture of credit bureaus Experian PLC (OTC ADR: EXPGY), Equifax Inc. (NYSE: EFX) and TransUnion Corp. – and Revolution Credit are changing the “inputs” used in ratings-systems models and presenting traditional lenders with new credit-scoring tools.
According to American Banker, VantageScore uses “so-called alternative data to evaluate consumers who cannot be scored using traditional criteria like timely credit card payments.” And RevolutionCredit “offers an alternative based on financial education. Consumers who sign up for the service – usually at the recommendation of their banks – are put through a series of online courses and tests on financial topics, the idea being that they will be more creditworthy once they complete the series.”
Nowadays, Big Data pipes deliver payment histories. They do so on our utility bills, our Internet and cable bills, our online shopping and payment habits, and on sales data from eBay Inc. (Nasdaq: EBAY) and other transaction platforms. That data is sold to third-party aggregators and directly to credit-scoring companies. Data is then modeled and run through proprietary algorithms to generate scores that are more “predictive” than their simple payment-history predecessors.
To keep up with the competition, FICO has had to build and test new models that they hope to make available by the end of this year.
Indeed, Dave Shellenberger, FICO’s senior director of scoring and predictive analytics, told American Bankerthat “using the new data [we] found that more than a third of previously unscorable consumers got above 620 on the new score, representing an acceptable level of credit risk.”
It’s all about modeling – to create “useful” credit-score insights. Said Shellenberger: “Because we’re an analytic company, it’s critical that the data is predictive of future payments.”
Whether you have “impaired” credit – or no credit history at all – understand the New Landscape in credit. Know that your day-to-day bill-paying habits – in fact, all your online purchase and sales transactions – are being gathered up and modeled to determine if you’re a candidate for a loan. And this is being pulled off by any number of the new lending platforms – as well as a lot of the traditional lenders.
Know this and you’re ahead of the game, because you may need to borrow from these folks at some point.
In the Land of the New Disruptors, knowledge is power – as well as an avenue to profit.
P.S. I encourage you all to “like” and “follow” me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then we’ll bank some sky-high profits.
[Editor's Note: Shah likes to hear from you. Let us know what you think about the financial Disruptors he's been sharing with you. Just post a reply in the comment box below.]
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