Creditworthy borrowers soon stand a better chance of getting loans under improved systems to determine credit scores. The revamped formulas will draw on a broader array of data about potential borrowers, helping lenders pick out those who are worth the risk. As they get more confidence in their ability to determine who can repay a loan and who can’t, they’ll be less inclined to set the bar overly high for everyone.
Banks “are taking it upon themselves to better understand risks from customers,” says Ted Landis at management consulting firm Accenture. About two-thirds of financial industry executives polled by Accenture said that increasing their ability to model and predict consumer behavior was a long-term priority.
New credit models will include income and assets, not just payment history, with some even linking to borrowers’ tax records. Bureaus are also more closely assessing changes in home valuations, and business owners and consumers with more equity are seen as less risky. In addition, loan officers are including payment data from utility and telecommunications companies to provide more information on those who don’t have established credit. That extra information will help new borrowers get a loan if they have a history of paying bills on time.
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“About 20 years ago, you would walk into a bank, and the loan officer would pull your credit but also talk to you about things like how and when you get paid,” says John Cullerton, vice president of product management at Equifax, which compiles consumer credit information. Over time, banks got away from face-to-face lending and relied more on automated tools that weren’t fully developed. Now “we have been able to recreate old school lending in a new school environment,” says Cullerton.
FICO, the company that calculates consumer credit scores, has developed an economic index that incorporates macroeconomic models to show lenders how a borrower might perform given the expected direction of the economy. Bureaus are also sending lenders alerts as soon as a borrower’s risk profile changes, as opposed to sending the information quarterly or monthly. The automated tools will allow lenders to keep tabs on a borrower’s debt-to- income levels to tweak interest rates and loan limits.
“We are helping lenders not only react to recessionary trends,” says Careen Foster, director of scores product management at FICO. “But we are also helping them with when and how they should adjust their scores now that we are back in a growth cycle.”
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