We Live In A World Centered Around Credit Scoring
The short answer is “hardly.” Credit scores are actually quite miraculous animals. Slightly modified they can be used to predict a lot of different things. In fact, if you have credit with any large sophisticated lender then you were probably scored (and are still being scored) by models that are designed to predict much more than whether or not you will pay your bills on time.
All scoring models have what’s called a “performance definition.” A performance definition is basically a complicated way of asking the question…”what are you designed to do?” So, for the FICO credit scores that we’ve all become accustomed to…they are designed to predict whether or not you will go 90 days past due or worse in the 24 months after your credit file was scored. That’s the FICO credit score’s Performance Definition…90DPD+ over 24 months. Don’t make this complicated because it really isn’t. Car keys were built to start cars. A toaster was built to toast bread. And a sock was meant to be worn between your foot and a shoe. Those are all performance definitions.
Here’s a list of some other lesser known models that are used to predict something other than general credit risk…and no, you can’t go out and get these scores anywhere. Only your lenders and insurance companies have access to them. Sorry!
Revenue Scores – These scores are designed to predict whether or not you will generate positive credit card revenue soon after you activate your credit card. The higher your revenue scores are the more likely you are to revolve a balance from one month to the next. And that means revenue!!
Lenders will use revenue scores in conjunction with risk scores when you apply for credit. They’ll also use them when they are buying their lists from the credit bureaus to determine whom they really want to send their pre-approved offers to. If you have a decent credit score but a terrible revenue score then you might not get an offer. On the flip side…if you have a not so good credit score but a great revenue score then most credit card issuers will roll the dice on you because you have such great revenue potential.
Bankruptcy Scores – These scores are pretty similar to general risk models. But, instead of predicting any sort of higher level of delinquency, these models are specifically designed to predict the likelihood of you filing for bankruptcy.
Lenders will use bankruptcy models in conjunction with risk scores when you apply for credit. Some lenders are particularly concerned about letting someone who is likely to file for bankruptcy in their doors…so they use these models to weed them out.
If you have a poor credit score then you will probably have a poor bankruptcy score. A lot of what’s “predictive” of general credit risk is predictive of bankruptcy risk.
Attrition Scores – These scores are built to predict if someone will actually STOP using credit cards. Attrition is essentially customer erosion. And, if a lender can do something to slow down that erosion then they’re willing to do it.
Attrition scores are used in the credit card industry primarily and here’s a scenario where it could be used…
Let’s say that I use an attrition score to “score” all of my credit card customers. The lowest scoring 5% are going to be the most at risk of stopping their use of my credit card. So, what can I do about that? It’s simple, do something nice for them so that they’ll NOT stop using your credit card. Why do you think you get convenience checks or phone calls from “customer service?” It’s because you are more likely to stop using their credit card so they want to just touch base with you so you don’t forget about them.
Personally I think the entire credit card industry misses the boat big time on this one. I’ve had the opportunity to sit through a ton of focus groups where consumers were asked why they used (and didn’t use) their credit cards. It was so entertaining. Most of us so called “credit experts” would assume that it was all about the interest rates and credit limits. Not even close. Most of the consumers didn’t care about all of that stuff. They cared more about the color of the card, when the bill comes in the mail, if you can reach a customer service agent or not when you call and things like that.
If the hot shots at the credit card companies would spend more time treating customers well and spend less time and money on silly commercials the entire industry would have a better reputation.
Response Scores – You know all of that mail you get from creditors trying to get you to apply for one of their credit cards? Well the industry average response to all of that mail is about one half of one percent. It’s terribly low. There are two ways for them to continue to acquire new customers…increase that percentage or send out more mail.
Most large credit card issuers send out over 1 billion (yes, I said billion) credit offers each year. The reason they send out so many offers is because the response rate is so low. Using a response score the credit card issuers can do a better job of targeting the consumers who are more likely to respond to one of their offers.
Again, I believe the industry fails miserably here. I’ve gotten 3 offers from the same credit card company IN THE SAME DAY before. I’ve also gotten offers from credit card companies trying to get me to sign up for the EXACT same card that I already have. They waste so much money with their scattergun approach and could do so much better if they just utilized response models (and common sense) a little more.
Behavior Scores – These aren’t really credit scores. These are scores that just use information in the credit card issuer’s “Masterfile.” A Masterfile is simply their record of your account use. Yes, that can be scored too.
They use these models to determine whether or not they are going to re-issue a card to you when it expires, increase or decrease your credit limit and even approve or decline over limit expenditures.
Almost all credit card issuers use behavior scores. Some do a good job with them…some don’t.
Collection Scores – Oh boy, you don’t ever want someone to score your credit file with a collection score. These scores are only used to score consumers who have an account that’s being handled by a collection agency or by a banks internal collections department. It’s never good to be scored by one of these models.
The purpose of a collection score is to determine how likely a collection agent is to collect a past due debt from you. If you have a higher collection score then you are more likely to pay up. If your score is lower then you’re less likely to pay them.
Insurance Scores – These are VERY controversial. These scores look at your credit reports and even your previous insurance claim information to predict whether or not you will be a profitable insurance customer.
There are a couple of different types of insurance scores. Some predict the likelihood of you filing an insurance claim. Others predict the likelihood of the insurance company collecting more in premiums than they will pay out in your insurance claims. This is called a “loss ratio” model. They are simply trying to determine if you will be a profitable customer or not. If they can collect $2,500 a year in premiums and only pay out $500 in claims then you were profitable that year. If, however, they collect $2,500 a year in premiums and pay out $25,000 in claims then that’s not good for them. They’re likely to increase your rates or cancel your coverage.
The question that consumers have is how in the world their credit behaviors impact their insurance scores. Very much like credit scores, if you have excellent credit then you will most likely have an excellent insurance score and vice versa. Here are their arguments…
• Consumer’s who have bad credit are more likely to file fraudulent insurance claims. Makes sense to me.
• Consumer’s who have bad credit are more likely to be under stress and therefore are more likely to have an automobile accident. I’m not sure I agree with this one but I guess I understand it.
• Statistics prove without a shadow of doubt that consumers with good credit are better insurance risks than those with bad credit. Can’t argue with solid statistics.
So the next time you think that all you have to do is earn and maintain an excellent credit score…think again.