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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
“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.”
-
What You Learn Becoming Your Mother's Financial CaregiverWriter and certified financial planner Beth Pinsker talks to Kiplinger about caring for her mother and her new book.
-
I want to help pay for my grandkids' college. Should I make a lump-sum 529 plan contribution or spread funds out evenly through the years?We asked a college savings professional and a financial planning expert for their advice.
-
Will AI Videos Disrupt Social Media?The Kiplinger Letter With the introduction of OpenAI’s new AI social media app, Sora, the internet is about to be flooded with startling AI-generated videos.
-
What Services Are Open During the Government Shutdown?The Kiplinger Letter As the shutdown drags on, many basic federal services will increasingly be affected.
-
The Economy on a Knife's EdgeThe Letter GDP is growing, but employers have all but stopped hiring as they watch how the trade war plays out.
-
Banks Are Sounding the Alarm About StablecoinsThe Kiplinger Letter The banking industry says stablecoins could have a negative impact on lending.
-
Apple Readies for AI Upgrade with New iPhonesThe Kiplinger Letter The tech giant has stumbled when it comes to artificial intelligence, but a new batch of iPhones will help it make headway.
-
Japan Enters a New Era of Risk and ReformThe Kiplinger Letter Japan has entered a pivotal moment in its economic history, undertaking ambitious policy and structural reforms to escape from decades of stagnation.
-
How Consumers Are Tinkering with Cutting-Edge AIThe Kiplinger Letter Companies launching artificial intelligence tools are jostling for consumer attention. Some products are already building a deep connection with users.
-
After Years of Stagnant Growth, Hope Emerges for EU EconomyThe Kiplinger Letter Can a German fiscal push outweigh French political peril?
