Lenders Look for Good Risk in bad Credit Scores

Shortly after the financial meltdown, lenders of all stripes pulled back their borrowing generosity. Credit card issuers slashed credit limits, while mortgage lenders and auto lenders approved only those with the most pristine credit.

Now, years removed from the credit crisis, lenders are looking for more borrowers but are still shying away from taking on extra risk. The key is finding consumers who are good credit risks, even if they are plagued by marginal credit scores or have no scores at all.

"Lenders want to grow their business, but they don't want to repeat the mistakes they made before the recession," says Ankush Tewari, director of strategy and market planning at LexisNexis, an alternative data mining company. "One of the ways to solve that problem is to look at other data sources to add to the traditional credit bureau files."

The impact could be huge for the approximately 50 million consumers whose credit files are so thin or nonexistent that they produce no credit score, such as young adults or recent immigrants. Then there are the millions of consumers who fall in the mushy middle of credit scores, somewhere between subprime and superprime, who could get better rates on loans because of housing stability.

"Adding nontraditional data can increase a lender's approval rate by 5% to 15%," Tewari says. "They can book more creditworthy consumers and not make offers that are too risky."

What are lenders looking at now?

There are three general categories of this so-called nontraditional data: public records, utility payments and rent payments.

Many public records -- such as liens, judgments, bankruptcies, lawsuits and professional state-issued licenses -- already appear on credit reports from Experian, Equifax and TransUnion and are used to calculate FICO credit scores. However, other types of public records, such as property records and professional licenses, aren't collected or considered.

Professional state-issued licenses -- such as a hair stylist's or electrician's license -- indicate a potential income stream from that profession, Tewari says. That could make someone a better credit risk than their credit score indicates.

"In a hypothetical situation, the professional license information may push the consumer over the hurdle and get them approved," says Tewari. Or, "There may be other characteristics, such as property ownership or address stability, that may help get them approved."

Rental payment is another popular category. Experian got into the game in January 2011 when it started to include positive rent payment data in its traditional credit reports. The newest version of VantageScore, unlike the FICO credit score, will incorporate those data when calculating a score. The VantageScore will also consider telecommunications and utility data if they're present in a consumer's credit file.

Nontraditional data that could get you approved

Public records.
Professional state-issued licenses.
Rental payments.
Utility payments, including cellphones.

"All of these relationships are predictive, just like a credit card," says Patrick Reemts, director of credit risk solutions at ID Analytics, a company providing repayment history for cellphones, cable and satellite TV.

Reemts says past delinquencies on these accounts predict future ones. The amount of monthly payments also offers credit risk insight: lower payments are generally lower risk. And how often a consumer opens new accounts indicates their stability or instability.

Utility payments, especially cellphone bills, can be especially useful in providing a credit risk profile to people who don't have a credit file at all.

"What's the first thing (most people) do? They get a cellphone," says Reemts. "It's the first relationship a consumer gets, and we have it from the very start."

Who could be helped by lenders changing their tune?

New immigrants and young adults are among the types of people who have little to no credit history, but who could prove to be great credit risks. Older Americans whose debts have long been retired, along with consumers who have managed their personal finances mostly by checking or cash, also fall into this category. There are about 50 million people who fall into this credit abyss, says Tewari.

Then there are the consumers who struggled during the recession, either suffering a job loss or a foreclosure, but are now getting back on their feet, says Reemts.

"Lenders want to lend to those folks again without breaking their portfolios," he says. "And they want to do it in a way that's safe and very consumer-friendly."

A 2011 study by FICO found that 1.5% of the 200 million consumers with FICO credit scores were considered "rising stars," people whose scores had risen more than 100 points in 4 one half years. Lenders want to capture those types of consumers sooner rather than later.

Last, there are the millions of consumers whose credit scores aren't stellar or awful, but fall somewhere in between 620 and 700 on the FICO range. They may qualify for a loan with their traditional score, but could receive an interest rate that isn't actually appropriate. For example, someone with a good rent payment history and stable housing should get a better rate than someone who's transient, even if they have the same score.

"It refines the rank ordering of people in lower credit bands, so some are promoted up," says Eric Lindeen, director of marketing at Zoot Enterprises, a company that helps lenders with credit evaluation solutions.

What can a consumer do?

The percentage of lenders using alternative data either selectively or across the board on all applicants remains small so far, Lindeen says, although he expects some major announcements about alternative data in the next six months. And none of the lenders that incorporate nontraditional data are advertising their strategy.

That makes it hard for a consumer who knows they have no credit history or a spotty one to target lenders that may give them a second glance. But it also raises the importance of shopping around, whether it's a credit card, mortgage or auto loan, to get the best terms for your credit profile.

"You may be declined by Company A, but you may be a fantastic opportunity for Company B," Lindeen says. "It really depends on what company you're working with."

The rise of this alternative data poses another challenge for consumers: What's in it, and what can lenders look at? Fortunately, the Fair Credit Reporting Act requires that these specialty consumer reporting companies provide consumers a free look inside their files.

It may be worth your time to pull the files at some of the larger data collectors, such as ID Analytics, LexisNexis and CoreLogic, to make sure what they are telling lenders about you is in fact accurate.

"Consumers have a right to access that information, and they should," says Tewari. "Every consumer should know what their credit files look like."