Did your credit score recently increase for no apparent reason? Or did it fall inexplicably even though your behavior and financial situation hasn’t changed significantly?
If you answered “yes” to either one of those two questions, it’s possible a revision of credit score evaluation standards could be to blame.
Similar to any tool, technology can be used for positive or negative ends. Like it or not, the integration of advanced technology into our culture has had widespread implications.
It’s precisely because of the impact of advanced technology that the credit bureaus now have the ability to analyze substantially more information when it comes to assessing an individual’s credit-worthiness. This is not only pertinent to my business as a mortgage broker but also particularly relevant for anyone looking to buy a home or purchase an investment property.
Instead of only being able to look at a snapshot of an individual’s finances at a given moment in time, it is now possible to review up to two years of payment history. The implication of this added complexity allows for the evaluation of trends in the behavior of a potential borrower. It also enables lenders to accurately determine whether a borrower is a “revolver” or a “transactor” when it comes to the payment of credit card debt.
As the name implies, a transactor is an individual who pays the entire balance on their credit card each month to avoid interest. A revolver is one who is only able to pay the monthly minimum.
Even more fun terms have sprouted up from the credit bureaus’ new technological capabilities, such as a “partial revolver,” who carries a credit card balance but consistently makes a payment that is higher than the monthly minimum. There is also the “nonactivator,” characterized as an individual with the self-restraint to get a new card but avoid using it. One of my favorites is the “rate surfer,” who continually moves credit card balances around in an effort to get the best rate.
Believe it or not, the ability of the credit bureaus to generate reports with added depth and complexity is not entirely a negative development. In fact, this will have a positive impact on credit scores for those who have “followed the rules,” as well as those potential borrowers who might have been viewed as a risky proposition in years past.
Consider the following example of two people who had their credit scores evaluated on the same day. Each had the same amount of credit card debt - $5,000 - and the same income level. One individual (we’ll call him Sam) had been chipping away at his debt for years and $5,000 was the remainder of a balance that once exceeded $20,000. The other individual (we’ll call him Kyle) was a transactor for many years and his balance two years ago was only $500.
Prior to the implementation of the new technology, Sam and Kyle would have appeared to be the exact same individual, financially speaking. This is due to the fact the credit bureaus were only able to review a snapshot of a person’s monthly balance and credit limit, along with whether or not they made the monthly payment on time.
The added complexity of the credit bureaus’ reporting capabilities now means that Sam’s prudence and determination would be a much more significant factor in determining his credit worthiness, and his credit score would likely increase. On the other hand, Kyle’s apparent financial trouble would at least warrant an explanation and it’s probable that it would make him a riskier candidate for a loan than in years past.
As you can see, it’s clear that trending and financial behavior now exerts a significant impact on credit scores. If you have questions about your credit-worthiness or would like to know how you can get preapproved for a loan, contact me at the number below.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.