Beyond credit scores: How lenders are vetting consumers in creative new ways
Americans, to their credit, are largely aware that a good credit score equals good credit health and that’s for a good reason.
With a superior FICO credit score of 760 or higher, a financial consumer represents a good credit risk to lenders and creditors. Conversely, any credit score south of 650 may, at best, get you higher interest rates on loans and credit and at worst, rejected for a loan or credit application, depending on the creditor.
On the upside, most U.S. adults are headed in the right direction, credit score-wise.
According to Experian, on the leading credit scoring firms, Americans sported an average FICO credit score of 703 midway through 2019 https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/ – any FICO score over 700 is deemed to be solid by financial experts.
Credit scores don’t stand alone
That said, credit scores aren’t everything.
In fact, they’re only three numbers out of a menu of criteria lenders use to make credit decisions. More and more, they’re also using other criteria to make decisions that impact financial consumers that go beyond mainstay criteria like on-time payments and low credit balances.
“Credit scores by themselves can be deceptive,” says Brian Davis, a real estate investor and co-founder of SparkRental.com, a personal finance and investing platform. “There are plenty of people out there with 700-plus credit scores who have declared bankruptcy within the last few years.”
Davis is a former account executive for a mortgage lender and a current landlord with some specific ideas on how creditors view consumer credit scores.
“As a landlord and former loan officer, the first thing I look at on a credit report is payment history,” he says. “People either tend to be rigidly conscientious about paying their bills on time every month or not, and you can see these patterns clearly in their payment history.”
Davis also looks for any public records, such as liens, bankruptcies, or foreclosures, when reviewing credit applications.
“At a minimum, it means you should ask more questions and find out exactly what happened and why,” he says. “for example, beyond credit, you need to verify the consumer’s income as well. While income is easy to verify for people with a W-2 job, it’s harder for self-employed people. So, you look at bank statements and tax returns to get a sense of total income.”
Here are additional consumer financial factors consumers should know, beyond credit scores, that can swing credit decisions in their favor.
Gyrating incomes. Lenders and creditors might keep an eye out for frequently shifting sources of income as well.
“Someone who has worked the same job for five years looks far more reliable as a borrower than someone who has changed jobs four times in the last five years,” Davis says.
Social media activity. One of the additional ways creditors check your financial health is via social media platforms including Twitter, Facebook, Google+, Linkedin and others.
“The same information is directly fed to credit and lending agencies as big data to evaluate your creditworthiness,” says Rameez Ghayas Usmani, a social media expert at Pakistan-based PureVPN. “Social credit score is determined by your number of followers or friends, education or job descriptions, kind of people in your social circles, similarity to established loan recipients.”
“You can maximize your credit score through social media by keeping your job and location history accurate, having friends with no financial woes and avoid sharing sensitive information,” Ghayas Usmani says.
Debt-to-income ratios. While creditors will always look at the amount of debt an applicant has on hand, what’s really measured is the amount of that debt compared to income earned on an annual basis.
“Creditors and lenders also look at your employment history and also your income to debt ratio when making financing decisions,” says Gladice Gong, a personal finance blogger at Earn More Live Freely. “Lenders want to make sure that you have a steady income and also you are earning more than enough to repay your loan.”
“Consequently, one of the best ways to improve your credit score is to pay off your debt and lower your credit utilization ratio,” Gong says.
Job and living history. Other external factors that go beyond the traditional credit score include residence and job time.
“Stable job and residence history are key factors when an underwriter may be on the fence in making a credit decision,” says Lisa Johanning, vice president of the consumer loan program at Axiom Bank. “Additionally, filling out your checking and savings information and other assets as requested on most applications, including balances, also goes a long way towards making a credit decision. This lets the bank or finance company better understand your financial position as a whole.”
Too many credit cards. Another tip to helping to increase your credit score is to avoid multiple open charge cards or revolving cards at the same time and closing any cards you haven’t used in over a year, Johanning says.
“Keeping your revolving credit limited to a max of three-or-four credit cards that are actively used but are paid off each month can go towards increasing your FICO score,” she advises.
What does your banking activity look like? Creditors could also study your bank statement to see if you’re a good credit risk, says David Evans, founder and CEO of DecisionLogic, a bank verification system enabling lenders to instantly verify a potential borrower’s banking information in-real time.
According to Evans, a consumer’s bank statement can be a far more accurate predictor of risk. “Consumers must, therefore, consider how their spending habits and financial behaviors can affect how likely institutions/lenders are likely to lend to you,” he says.
Those behaviors would include the following:
— When you get paid – is it consistent?
— Consistency of the amount in your accounts
— Where you take out money – do you take them out at a casino ATM on payday every Friday, for example.
If you have trouble getting credit
If your credit score is low, but you have other financial considerations that weigh in your favor, you do have some options, credit experts say.
“Some lenders are starting to evaluate other factors,” says Greg Mahnken, a credit industry analyst at Credit Card Insider. “For example, credit card issuer Deserve is an option for those with limited or no credit history because they consider less traditional factors when evaluating your ability to pay off the card.”
According to Mahnken, those factors include:
— Your current financial health
— Monthly housing expenses and income
— Current assets (you’ll need to link a bank account)
— Future employability
These “non-traditional factors” help Deserve evaluate your likelihood to use the credit card responsibly, even if you have no credit history.
“For those with a thin credit file, including recent immigrants to the U.S. or college students, it can be a step towards building a credit history,” Mahnken says.
Brian Davis – Email: firstname.lastname@example.org
Rameez Ghayas Email: email@example.com
Gladice Gong – Email: firstname.lastname@example.org
Lisa Johanning via Kate Quinones – email@example.com
Greg Mahnken – Email: firstname.lastname@example.org
David Evans via Trish Acosta – Email: email@example.com