Have A Plan For Your Money Or Someone Else Will

New Ways Bankers Are Spying on You
Wall Street Journal

Big Banker is watching you—more closely than ever.

With lenders still skittish about making new loans, credit bureaus and others are hawking services that help banks probe deeply into your financial closet. The new offerings include ways to look at your rent and utility payments, figure out your income, gauge your home’s value and even rate your banking habits based on details like whether your direct deposits have stopped.

All of this could influence your financial freedom—not to mention the number of junk-mail solicitations you receive.

Ken Lin, CEO of Credit Karma, a credit-score information website, knew he had a good credit score. But when he recently applied for a new credit card, he was rejected: The lender had flagged him as a higher credit risk because the value of his California home had declined and his mortgage principal wasn’t declining—giving away that he has an interest-only mortgage.

“It’s a lot more than just your credit score today,” he says.

Your credit record still matters, of course. But here are some newer ways lenders and financial-services companies are sizing up your financial behavior and credit-worthiness:

• Bank-depositor behavior scores. Fair Isaac, the creator of the widely used FICO credit score, is marketing bank-depositor behavior scores, which are used by banks to assess their own customers.

The scores are based on balances, deposit records and withdrawal activity, says Debb Gordon, a senior principal consultant at Fair Isaac.

Unlike credit scores—which are most affected after payments are late or credit is maxed out—behavior scores can be a leading indicator of credit risk. They also can help banks identify which of their customers might be ripe for additional services and rewards programs and which might need special attention because, for instance, their direct deposits had stopped.

• Income estimation. This business took off earlier this year after the Federal Reserve allowed lenders to use credit bureaus’ income estimates to satisfy new requirements that credit-card applicants show the ability to pay their debts.

The bureaus use credit-record information, such as the size of your credit lines and the age and size of your mortgage, and plug it into models to predict your earnings. Those estimates also may be used to double-check the income you report on credit applications or to determine if you should be preapproved for credit.

You can’t see those estimates. But if you are denied credit because of them, you must be given a chance to provide additional information.

• Rent payments. An estimated 40 million consumers, including young people and people who prefer to pay in cash, have too little credit experience to generate a useful credit score. But they are likely to pay rent or utility bills, which could help credit bureaus better assess their credit-worthiness.

Experian, one of the three major credit bureaus, bought RentBureau—which collects rental-payment data from large property managers—and expects to integrate that information into credit records before the end of the year.

Even if those consumers don’t want credit, that information could help them win better rates from insurers, which may use insurance scores based on credit records, and fatten up thin credit files, which some employers check before making hiring decisions.

Credit bureaus say they also would like to offer data on cellphone payments, but have run into concerns over privacy issues, which may require legislation to untangle.

• Collection triggers. If you owe money, you can run, but you can’t hide. Credit bureaus can now send daily reports to collection companies when a debtor’s financial status changes—say, if new employment information appears or if a debt starts to decline. A drop in credit use would indicate that the consumer has more capacity to pay and a better chance of repaying other outstanding debts.

• Home values. As home values have plummeted and foreclosures have soared in many states, lenders of all stripes have become more cautious, as Mr. Lin found. Using home values as a factor in credit decisions doesn’t appear to be widespread, but it may come into play when someone in, say, Nevada or California applies for a new loan. Of course, it also could work in your favor if you are one of the roughly 25 million Americans who owns a home outright.

• Your wealth. Information about your assets other than homes and cars, which aren’t part of the credit record, may soon play a bigger role in your financial life. With a better sense of a consumer’s balance sheet, lenders might be able to target potential customers better and also have a fuller sense of their likely risk. Equifax, another of the big three credit bureaus, offers financial-service providers an estimate of liquid wealth as part of a financial “suite” of information.

As all of this becomes a widespread practice, those who are prompt and careful in all aspects of their financial life may have more options—and those who have been sloppy with, say, their bank accounts may be penalized for that.

Write to Karen Blumenthal at karen.blumenthal@wsj.com

As lending requirements tighten even for the most responsible consumers credit scores are becoming increasingly more important. In order to get a loan these days, a consumer’s score not only needs to be healthy, it needs to be in fighting form.

Today, a FICO credit score of 750 or higher is considered the gold standard among lenders, says Ben Woolsey, director of marketing and consumer research at CreditCards.com, whereas in the past borrowers with scores of 720 or higher could land the best rates (FICO scores range between 300 and 850).

Banks are only lending to people with stellar credit and I think that will continue for some years, says Linda Sherry, spokeswoman for consumer advocacy group Consumer Action.

Those whose score falls well below this all-important 750 level can expect to hit some hurdles. They may have a harder time getting decent rates on a mortgage or student loan.

The problem is there are all sort of ways your score can get decimated and we’re not just talking about an overdue bill. Some strikes come unexpectedly and the damage is done before you know it. To prevent any surprises, here are five not-so-obvious ways your credit score can get tarnished:

Too Many Inquiries

Each time a lender looks into your credit history, the credit agencies take note. If too many creditors start dipping into your file within a certain timeframe — say six months to a year — it starts to have a negative impact on your credit score, explains Gerri Detweiler, credit advisor for Credit.com.

The problem here is that consumers don’t always realize when their credit is checked. If, for example, you shop for a new cellphone plan, the service provider will typically check your credit report and use the information in its decision to sign you up. Most utilities, including cable providers, fall into this category, as do (surprisingly) car-rental agencies. An inquiry shows on your credit report and can degrade your score if you actively sought out the credit relationship; inquiries made unsolicitedly (like when you receive a credit-card offer in the mail) won’t hurt your score, says Craig Watts, spokesman for Fair Isaac.

Similarly, when shopping for a mortgage or auto loan, Sherry advises that consumers apply for loans within a 30-day period. The FICO scoring model recognizes that if you go out to six car dealerships within two or three weeks and they all pull your credit, it’s seen as shopping for one car, not six, says Sherry. But if you visit six different dealerships over a span of several months, it might look like you’re shopping for six cars. You want to take your time but not too much, she says.

Small, Unpaid Debts

Believe it or not, that parking ticket you put off paying can come back to haunt you. The same things goes for the movie you returned a week late to Blockbuster and the book you borrowed from the library in 1999. After a certain period of time has passed, some cities will turn a bunch of unpaid debts over to a collection agency. The agency pursues the overdue amounts, and when a collection agency record shows up on your credit report, it will absolutely hammer your credit score, says Watts.

Store Credit Cards

Landing a 15% discount on that new winter coat — just for signing up for a Banana Republic store card — can be really tempting. The problem, though, comes when the collection of cards in your wallet look like the store directory at the mall. All those cards for individual retailers means you have a lot of open lines of credit, which the credit bureaus tend to view as potential trouble, especially when the cards aren’t affiliated with a national provider such as MasterCard or Visa, says Woolsey. The negative impact on your credit score will most likely outweigh those one-time discounts at the store, he says, not to mention that APRs on retail cards can reach as high as 26%.

Authorized Users

Whether it’s to make sure their college-age son or daughter can access emergency funds or pay for a hotel room over spring break, many parents add a child to their credit-card accounts as an “authorized user.” This means the principal cardholder (in this case, let’s say the mother) allows her son to use the account, but does not hold him responsible for making the payments. For the most part, it’s a win-win situation for the son. He not only gets to put pizzas for his friends on the family plastic, he also gets the added benefit of building up his short credit history. But if Mom is late paying the bill even one time, her credit score will drop and so will her son’s, says Watts.

Name Changes

Something as innocuous as a middle initial can impact your credit score for the worse. Say you’re known as Jenny E. Smith on your credit report. You apply for new credit one day and drop the E, or decide to go with Jennifer instead (or you take your husbands name). The credit bureau will create a separate file for you even though Jenny E. Smith and Jenny Smith both live at the same address, says Watts. To prevent these kinds of errors from spoiling your credit score, notify your creditors and the credit bureaus of any name change, says Watts, and make sure they understand you’re the same person.

*excerpt from October 20, 2008 article by Lisa Scherzer at SmartMoney.com. All Rights Reserved.