Are You Paying Your Bills the Right Way?

Today, credit is far more important than ever. Lenders are known for checking credit, but a person’s overall credit history might be used for rental agreements, credit offers and several other purposes.

Even employers have started qualifying candidates based on their credit history. For quite some time, lenders have always checked whether potential borrowers pay their bills on time.

However, these days, lenders are diving even deeper into the credit rabbit hole and actually looking at how potential borrowers pay their bills.

While it’s important for consumers to pay their bills on time, the way the bills are paid is becoming increasingly important. In fact, many lenders are choosing customers based on how they pay their bills.

Paid In Full

Lenders are able to look at a credit report and determine if a potential borrower pays his or her credit cards in full each month. Consumers who pay off their credit card balances in full every month are viewed as low risk.

An individual who carries a balance every month is viewed as a revolver, which represents a higher level of risk. A number of lenders are using payment information to decide who to market credit card offers to while others are using the information to decide if they want to completely avoid granting credit.

Payment information is even being used by lenders to determine specific terms and rates. Fannie Mae, one of the biggest lenders in the world, says it is requiring mortgage lenders to use the information in loan decisions, but mortgage lenders won’t use the data until sometime towards the middle of 2016.

Payment Data and How It Affects Credit

The payment information is called trended credit data, and in the near future, it will be used in loan decisions. For some consumers, the use of the data could cause some problems, but for others, it could offer several benefits.

For example, the data could help consumers who have lower credit scores get a mortgage, but the payment data would need to show that they have a positive history of paying off their cards every month. The separation of those who pay their cards off in full every month from those who don’t is one of the hottest credit report attributes for researchers and lenders.

The bottom line is that lenders are always searching for improved ways to assess the risk of consumers they grant credit to. The major reason why they seem to be latching onto this new data is because it provides unique insights that the traditional credit scoring models do not offer.

Whenever new information like this becomes available, lenders tend to latch onto it and find the best way to incorporate it into their risks analysis models.

A few experts said they would be surprised to find any number of large banks that are not actively analyzing payment trend data and deciding how the information can be used effectively.

Since the data allows lenders to see trends over time, it provides them with a much bigger picture when analyzing borrowers for risk.

The Problem with Current Credit Scores

The credit scores that are used most frequently in lending decisions don’t have the power to make the distinction between consumers who carry credit card balances, and consumers who do not.

The two major credit scoring models, FICO and VantageScore, don’t offer payment trend data, so there is no payment trend data accessible by major lenders. Roughly three years ago, TransUnion, Experian and Equifax started adding payment patterns to consumer credit reports.

Although it took quite a lot of time, researchers finally found a correlation between payment patterns and risk. In other words, researchers found that payment patterns happen to be very effective for predicting whether or not consumers will default on their loan obligations.

Many experts say the data makes a massive difference because it can make it much easier for lenders to predict what consumers pose a greater risk. The payment data groups consumers into two categories.

There is one category for consumers who pay their credit cards off in full every month, and the other category is for consumers who carry a balance.

According to experts, consumers who carry a balance are nearly three times more likely not to pay on new auto loans or credit cards than consumers who pay their balances off every month.

The payment data also shows that consumers who carry a balance are also five times more likely to stop paying on their current credit cards, which was found by a study performed by TransUnion.

There are also what the industry refers to as partial payers and minimum payers. Partial payers are consumers who actively pay down card balances, and minimum payers only pay the minimum balance amount that is required each month. Studies show that partial payers tend to be less risky than those who only pay the bare minimum balance every month.

What The Major Credit Bureaus Are Doing

Experian is one of the three major credit bureaus, and it offers something called Trended Solutions, which is one of its products. The company has started incorporating payment trend data into its line of products.

The purpose of the data is to help lenders determine risk much more easily, and it makes it easier for lenders to target credit card offers to borrowers based on long-term payment trends. Equifax is also doing something similar. They’re offering a product that is called Dimensions.

There is even a similar product offered by TransUnion, which is called CreditVision. Lenders have started using these different products when making credit decisions.

Many lenders create custom scores and purchase payment trend data from the credit bureaus. Recently, TransUnion has introduced a newer version of their original payment trend product, and it’s called CreditVision Link, which factors in magazine subscriptions, address changes and checking account data.

The data is used to find consumers who represent lower risk but have been downgraded by the standard credit scoring formulas. Through the use of alternative data and payment patterns, TransUnion’s formula has been able to identify roughly 23 million individuals as solid risks.

Data shows that traditional scoring methods categorized all of these individuals as bad risks. These new products that are offered by the major credit bureaus check over 30 months of balance and payment data. Other formulas provide a snapshot of a single month.

The new products also check payment data for an 82-month period and add points for responsible payment patterns. It’s important to understand that the use of these payment patterns isn’t normal yet, but it shouldn’t be long before it’s considered best practice. To benefit from this change, consumers need to start paying their credit card balances off in full every month.