Looking beyond buyers' credit scores
Dennis Carlson, Equifax deputy chief economist
It's a finance and insurance manager's biggest challenge: a customer who's ready to buy but has no credit score.
Not a bad score. None.
In the past, there was very little that could be done if a shopper had no credit score, due to, say, a personal bankruptcy filing that erased his or her credit history.
Today, though, lenders can tap a new array of technology, relying on nontraditional credit data for insight into a consumer's debt-management history. That can overcome a missing credit score and other problems.
Those tools mean lenders can be far more confident about the quality of their loans, even as the portion of automotive lending that goes to subprime borrowers continues to rise. Today's lenders know more about the details of those borrowers than they did even two years ago.
And when lenders are confident, more vehicles get sold.
Peter Turek, TransUnion's vice president of automotive, says nontraditional data help "expand the universe of potential borrowers for lenders." TransUnion can provide a clearer picture of a person's credit history by using cell phone, cable and utility records.
Lou Loquasto, auto finance vertical lead for Equifax, says the rise of tools using nontraditional data is a win-win-win development for dealers, lenders and consumers. The credit reporting firm's consumer services database, which includes cell phone, cable TV and utility payment information, has been available to lenders for less than two years.
Loquasto says that although pulling credit bureau reports is still important because they have the most information, dealers must realize there are other ways to look at a customer if they come across a "no hit, no score."
The consumer can be a good risk even if he or she doesn't have a credit score, he says. For instance, it could be someone buying a first car.
"One thing we're seeing now is there are a lot of customers out there that don't have credit scores. Maybe some of the younger folks are going longer without opening up traditional trade lines," Loquasto says.
"One thing that Equifax and others have is nontraditional credit. Equifax can tell a lender, 'Hey, this customer has a $200 cell phone bill, they've got $400 in utilities, they've got $100 in cable, and they've had this for four years. They've paid perfect.'"
That sort of detail is still fairly rare. For example, a spokeswoman for Experian, one of the companies that supplies credit scores, wrote in an e-mail that the company doesn't have a product that incorporates data from telecommunications and utility companies.
According to data analytics firm ComScore, there are 129.4 million smartphone owners in the United States -- and not all of them have credit scores.
Or how about car shoppers with a subprime credit score? Subprime loans have grown steadily in recent years, climbing to 36.2 percent of all outstanding auto loans in the fourth quarter from 35.7 percent in the third quarter, Experian Automotive data show.
"They're not subprime individuals, they just have a subprime credit rating," says Dennis Carlson, an Equifax deputy chief economist. "There's a lot of connotations with that, and I think it's wrong, particularly after what we've seen with the recession, where a lot of people fell on hard times. Bad things happen to good people, and a lot of it is out of their control."
Although their scores may not be as attractive as before, those scores are snapshots that don't necessarily tell the whole story.
Loquasto says Equifax Dimensions data, available since last summer, show credit score progression over a two-year span.
"We can show that trended data -- where 24 months ago they were at 580, 12 months ago they were at 640, and now they're a 690. That guy is trending in the right direction," Loquasto said.
He also described a contrasting scenario that Dimensions data could present.
"You can see this guy has a 650 beacon score, he only used 10 percent of the open balances on his credit card. Twelve months ago, he had 50 percent of all his balances spent, and now he has 90 percent of all of his credit card availability spent," Loquasto explained. "His credit score looks good, but boy, he's starting to borrow more than he used to."
In October, TransUnion launched its CreditVision tool, which dives deep into consumer credit behavior going back 30 months.
The company says CreditVision knows whether people are paying off their credit cards in full each month -- called "transacting" -- or carrying a balance from month to month -- known as "revolving." In addition, CreditVision can tell whether consumers are "building balances on all their revolving accounts over time, or paying down balances."
According to TransUnion, CreditVision also is able to see how much people spend on their credit cards each month and whether that spending activity has increased or decreased from the year before.
Knowing whether someone is revolving on their accounts is key for the auto sector.
TransUnion found during an analysis of new consumer auto and credit card accounts that people who were revolving on their credit cards in the month before opening a new one were two to three times more likely than transacting consumers to become delinquent.
Data from Equifax and Moody’s Analytics shows that delinquency rates now sit around 3.5 percent after peaking at 6 percent in 2009.
“This new credit data can show you over the past 30 months how the consumer is managing every single account that they have with a balance, and how that balance has moved,” Turek says. “You really get a deep view into how a particular borrower is managing their debt beyond just the score.”
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