Over 70 million adults in
the U.S.
do not have a credit score or have a very limited credit history. Individuals
and families living with limited credit files are forced to take advantage of
alternative financial sources to cash their checks or get temporary short term loans
aka Pay Day Loans. Users of alternative financial sources generally pay very
high costs in relation to the usual transactions you might perform at your
credit union. Cashing a paycheck could cost $3 - $15. A two week $200 payday
loan could cost as much as $45 if paid on time. If the loan cannot be paid off
right away, it has to be renewed. In California,
that means the loan principle and interest has to be paid and a new loan
created. How many times will a person have to pay $45 to maintain and renew the
loan until they can afford to pay it off completely?
Several companies have
created alternative credit scoring products based on the analysis of
non-traditional data, including rental and bill payment history, insurance
payments, debit-card use and public records. They are trying to use this data to predict the payment history of
people who don’t have access to traditional credit products that can be tracked
through a FICO score.
That is basically what a
credit reporting bureau does for people with their credit. It reports the usage
of the various forms of credit a person has and tracks the payments made and
balances carried. Through a computer algorithm it creates a number that can
predict, with fair certainty, the future payment history of an applicant. Those
with FICO scores over 740 are more likely to make their payments on time and
manage their outstanding balances better than someone with a score of less than
740.
Why do some people want to use alternative credit
data? There is a profit motive as vendors can sell more products and services
if there is a universe of more qualified buyers. It could also help families
struggling with traditional credit by showing their propensity to pay their
rent, utility bills, auto insurance, and other regular payments. By using
alternative data, lenders stand to reach a large group of potential borrowers
about whom they currently have little or no information. For these consumers,
alternative credit scores strengthen lenders’ ability to:
-
Reliably rank order
risk;
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Efficiently evaluate
applicants for credit or design offers for credit;
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Increase approval rates
while controlling for acceptable levels of risk
Meriwest works
exclusively with Experian Credit Bureau. Experian offers various forms of
credit reports. We use three specifically:
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For
all auto lending, direct lending to our members and through the Credit Union Direct
Lending (CUDL) Network we use the FICO Auto 2 score. This is provided by
Experian, and is a variation of the basic FICO score – more heavily weighted to
the existence and performance on previous auto loans compared to the
traditional FICO score. This is similar to the “Auto Industry Option
Scores” listed below.
-
For
our other consumer loans, we use a custom score from Experian called a “Fast
Start” score. It is based on credit and personal characteristics such as
their time on the job, how long they have been a member, and other data.
-
We
also look at the Experian BK (Bankruptcy) score. This is a predictor of
the applicants likelihood of filing (or needing to file) bankruptcy, and is
used as a risk measurement in our analysis.
We don’t use
alternative scores, but do tend to look at our borrowers differently than a
traditional bank. In a traditional commercial bank, credit score lending is
King. If they are looking for a FICO score of 740 or above and that’s where you
score, your application has a preliminary approval pending review of debt and
income. If your FICO Score comes in less than 740, your application will be
declined due to credit. They will take no further action on your behalf outside
of sending you the decline letter.
Credit unions,
in general, take a more holistic view of their borrowers. Sure, the FICO score
is an important part of the loan qualification. Credit Unions would like to see
a 740 FICO Score just like the big banks. But if you miss the score by this
much (thumb and forefinger showing an inch), you may still qualify for a loan
at a credit union. Why? They look at the whole person, not just their credit
score. They look at how long you have been employed in the same business or the
same employer. How long have you lived in the area? Or at the same home? How
long have you been a member of the Credit Union? Have you borrowed from them
before? All of these questions go into making the credit decisions. I am not
saying that everyone with a less than 740 FICO Score gets a loan. But, if
someone misses the target score by ten or twenty points, it is not the end of
the loan. Credit Unions can take these questions into consideration and
possibly make the loan for them at a slightly higher rate. This is called, Risk
Based Pricing. If there is increased risk in lending to someone, say a 720 vs.
a 740 FICO Score, we can price our interest rate a little higher accordingly to
offset the risk.
Here is a run down of the
more common credit scores and alternatives to credit scores:
FICO Score: Created by the
Fair Isaac Corporation, FICO is the best-known credit scoring system in the United States.
It is a way of measuring an individual's creditworthiness. A FICO score is a
quantification of a variety of factors in an individual's background, including
a history of default, the current amount of debt, and the length of time that
the individual has made purchases on credit. A FICO score ranges between 300
and 850. The higher the score, the more likely that individual will pay their
bills in a timely manner.
Vantage Score: A consumer credit rating product developed by three
credit rating agencies - Equifax, TransUnion and Experian - as an alternative
to the FICO Score. VantageScore uses a different rating scale (501 to 990) than
FICO (300 to 850), and is branded as a score that provides lending institutions
and banks information related to sub-prime financing. The score is
calculated through a weighted average of a consumer's available credit, recent
credit, payment history, credit utilization, depth of credit and credit balances.
Auto Industry Option Scores: Auto
lenders are unlike other kinds of creditors. Many other creditors look at the
entire credit picture to make a decision. However, some auto
lenders base their decision solely on how previous auto loans were managed. So,
even if your credit scores are bad, if you never missed a car or truck payment
or sent one in late, your Auto Industry scores will most likely be higher than
the standard FICO scores.
Veritas (by Digital Risk):
Most recent alternative; used for home mortgage credit analysis. It Integrates
borrower credit characteristics with property and local real estate market data
along with proprietary behavioral prediction models.
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Our next Credit Myths workshop is this Wednesday the 5th of December
Credit Myths and Repair
6:30pm Wednesday December 5th
Meriwest Credit Union Main Office
5615 Chesbro Ave, San Jose CA 95123
