Have you been guilty of not always paying off the balances on your credit cards? Were there months when you were a bit short and were able to pay off only part of your balances?
Well, here’s the startling news. Your lenders know this.
Are you a “transactor” or a “revolver”?
If you pay your credit card bills in full every month you’re considered to be a “transactor” and a low risk. Conversely, if you don’t pay them off in full every month you’re considered to be a “revolver” and a higher risk.
How lenders use this information
Different lenders use this data different ways. Some of them use it to decide what types of credit cards and loans to market to which types of people. On the other hand, there are other lenders that are starting to use this distinction in deciding whether or not to grant credit at all as well as what terms and rates to offer.
Lenders are always looking for more assurance
The most important thing to lenders is assessing risk and this new payment trend data seems to provide better information than traditional credit scoring models. It’s thought that most banks will use this information in evaluating peoples’ creditworthiness because the data tells a better story as it allows them to see trends over time.
An example – Fannie Mae
As an example of this the giant government-backed company Fannie Mae that securitizes mortgages will require lenders beginning in the middle of 2016 to use this “trended credit data” in making decisions about mortgage loans. The reason for this is to help people get mortgages that have a good history of paying off their credit cards but have lower credit scores. This is in contrast to how many lending decisions are now made – and that’s based so heavily on credit scores – without taking into consideration the difference between people who pay off the balances on their credit cards and those that carry them forward.
The credit reporting bureaus
This trended credit data is now incorporated into the credit reports provided to lenders by all three credit bureaus – Experian, Transunion and Equifax. And researchers that have used the data quickly discovered that payment pattern differences could be very predictive in determining who will default and who won’t. A study done by the credit bureau TransUnion found that “revolvers” are many times riskier and, in fact, are three times more likely to default on auto loans and new credit cards than “transactors.” Plus, they are five times more likely to default on their current cards. This study also found that “partial” payers – or those people who actively pay down their balances – are typically less risky than people who make only the required minimum payments every month
What the credit bureaus have done
The credit bureau Experian has added payment trend data to its Trended Solution products. This helps lenders identify risk and target borrowers more precisely with credit card offers based on how they have behaved over time. Equifax has Dimensions, which is a similar product.
TransUnion offers a product called CreditVision that its customers have begun using to make credit decisions as well as ones regarding their marketing. All three of the credits reporting bureaus also sell payment pattern data to lenders who then use the information to create their own custom scores.
In addition, TransUnion has introduced a second-generation product called CreditVision Link that incorporates other non-credit data such as address changes, checking accounts and magazine subscriptions to help identify people that may be good credit risks but have been overlooked or downgraded using traditional formulas.
Both these TransUnion products track payments and balance data over 30 months instead of as just a one-month “snapshot.” Here’s an example of why this is important. Let’s say you’ve paid off your balances every month in the past two years except for one month where you weren’t able. A potential lender would see this for what it was – an anomaly and not the way you normally pay on your credit cards and you wouldn’t be penalized.
How this might affect you
Let’s say that you have applied for credit with a lender that has a credit score cut-off of 660. Let’s also say you have a credit score of 659. In this case, you would be turned down. However, your CreditVision score might add a few points if you’ve been regularly paying off or paying down your credit card balances. So, if your score were boosted to 665 you would get approved. And if your score is boosted well above the cutoff number, you could get a better offer such as a credit card with a lower interest rate.
Don’t worry. Your credit score won’t be affected
Both FICO and its biggest rival, the VantageScore, have said that they will not be incorporating this payment trend data into your credit scores. So while your credit scores won’t be affected lenders will be able to see how you’ve been handling your credit cards in the reports they get from the three major credit reporting bureaus. And you can bet that if you’ve been a “revolver” this will definitely have an effect on your ability to get new revolving credit.
Be a “transactor” and not a “revolver”
It’s always been best to pay off your credit card balances at the end of every month. When you don’t do this and begin carrying balances forward you could easily fall victim to the power of compounding interest and end up in debt hell. But as you have read it’s become even more important now to be a “transactor” and not a “revolver” as “revolvers” will have a harder time getting new credit and when they do it will have a higher interest rate. Making a late payment or defaulting on a credit card debt has always had a negative effect on your credit score and your ability to get new credit. This new payment trend data may also have a serious effect. While it’s always best for your financial well being to pay off your debts on time, this is now more important than ever.