Lenders are no longer just interested in whether you pay your bills or not. Increasingly, they are looking at how you pay those bills to determine whether they want you as a customer.
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.
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."
