Chris, a 41-year-old hospital lab worker from Needham, Mass., does all her shopping at the same department store. For as long as she can remember, every salesperson ringing up one of her purchases has asked whether she wanted to open an instant charge account.
Recently, Chris bit on one of the offers. There, in the middle of the store and lured by the promise of a 5 percent discount and a “nice salesperson who I figured would get an extra commission for signing me up,” Chris bared her financial soul into a credit application.
Minutes later, to her humiliation, she was rejected.
The news came from the salesperson, but the rejection was the result of a quick credit check that cross-matched Chris’ application with a scorecard. Chris didn’t pass muster.
It’s a private embarrassment suffered by an increasing number of people as the scoring systems become the single most pervasive method for determining creditworthiness. For many types of loans, the only person who sees the application is the data entry clerk; the data is then evaluated by a lender’s ever-changing scoring system and a verdict is rendered.
Credit scoring is almost everywhere, from the check guaranty companies that help stores determine whether to accept a customer’s personal check to the big mortgage lenders. Some institutions use more than one type of scoring system on each application, and getting a good credit score on one may not be enough to pass the second screen.
For Chris, the verdict came without explanation. The clerk knew only that the application had been denied. Eventually, the store provided vague reasons, but nothing that left Chris with a clear picture of what was wrong with her credit history.
“Whatever the reason was, it would have been nice to be informed, to know what I could do or what had really gone wrong, instead of being given a couple of vague variables,” Chris said. “I mean, I had just bought a car and had applied for credit before and was never turned down. Suddenly this happens and I don’t know why.”
Getting a handle on credit scoring can be tough. Credit bureaus don’t actually rate consumers. Instead, they provide a “risk score” based on the statistical likelihood that someone like you will default. It is the decision of the lender whether to then grant credit. Each institution, of course, has its own idea of what makes for a good risk score, and how it applies those ideas to loan applications can vary on a daily basis.
“Scoring has become very pervasive, and it’s one of those situations where you really don’t want to find out that there is a problem when it is already too late and you want to buy a car or house and can’t,” said Gerri Detweiler, a Dale City, Va., independent credit consultant and author of “The Ultimate Credit Handbook.”
While lenders won’t say exactly how consumers are scored, there are clear patterns.
The whole idea of the scoring systems is to figure out what people who pay their bills on time have in common, as well as the similarities between members of the delinquent-payment set.
Here is what experts say are the typical problems encountered in credit scoring:
– Too many credit cards. Most institutions see bank cards as a good creditworthiness indicator because the debts are unsecured so you don’t have the house riding on the monthly payment. A few credit cards is good; the fact that someone else trusted you enough to issue you a card is a good sign.
Too many, however, is a problem. When a consumer closes a credit card, the lender usually doesn’t “close” the account. They leave it marked “inactive,” where it lurks on a credit report.
Experts suggest closing unnecessary charge accounts and requesting-in writing, with copies kept on file in case of further disputes-that the institution notify its credit agencies that the account is history.
“But don’t close everything,” said Michael Staten, director of the Credit Research Center at Purdue University, “because having no credit doesn’t make you look normal either. Just use common sense and keep the cards that you really need.”
– Too many tradelines. A tradeline is the industry term for the total number of listings on your credit report. This includes mortgages, personal loans, student loans, car loans and credit debt.
Again, too many is bad news, but so is not having enough. “And since the scoring systems are secret,” Detweiler said, “we don’t know what `enough’ really means. Be sensible.”
– Too much debt for your income level. Surprisingly, income is often overlooked by the credit card issuers so long as you meet a minimum standard. On bigger loans, however, the lenders calculate a consumer’s debt-payment burden. If debt consumes more than 30 percent of take-home pay, most lenders get concerned.
– Too many delinquencies. Paying on time is crucial. Said Detweiler: “Plenty of people go delinquent for a month or two and then make a big payment and pay the whole thing off, thinking it gets them off the hook. It doesn’t, at least where their credit report is concerned.”
Pay at least the minimum payment due on time.
– Too many inquiries on your credit report. Lenders get nervous when they see a lot of other institutions reviewing your credit report in a short time span. It’s a sign that you may be looking to expand your credit quickly, which makes you a bigger risk.
While inquiries stay on a report for two years, the last six months is considered the crucial factor.
In Chris’ case, she got scared by her rejection and, so, applied for a preapproved card offer she received in the mail. That too was rejected. (“Preapproved” applications are subject to review before the cards are issued.) So was a second preapproved application.
“All the time I was applying, figuring a preapproved card would help my credit rating, I was hurting my credit record,” she said. “It would have been nice to know that.”
– You don’t have both a checking and a savings account. Even if you only have $10 in one of those accounts, the mere presence of both a checking account and a savings account is a plus on a credit report.
“Statistically speaking, people who have both types of accounts behave differently than people with only one bank account,” explained Terry Hughes, vice president of research and development for the MBS Division of CCN, one of the leading providers of scoring technology.
Other big factors in risk scoring include income, age, proximity to the limits on your current accounts, length of time in your current job and residence, and whether you have had serious money troubles or a bankruptcy in your past.
“The time to clear that stuff up is six months before you apply for your next loan or credit card,” said Robert Heady, publisher of Bank Rate Monitor, a trade paper that follows banking and credit trends. “Start building your profile now.”
