Lenders track every last detail of your spending habits, and then use the data to estimate not just how big a risk you are but how profitable a customer you might be.
Recently my husband and I received nearly identical balance-transfer offers from our respective Bank of America cards. The offers were identical, that is, except for the rates we'd be given. He was enticed with a 0% rate. Mine was 2.99%.
We live at the same address and share the same income. We both have high credit scores (although his are, annoyingly, a few points higher than mine).
So are these different offers evidence of rampant sexism on BofA's part? Hardly. The pitches were the result of complex and largely secret scoring systems that most financial institutions use to boost profits while limiting losses.
You've heard by now of credit scores, the three-digit numbers lenders use to gauge your creditworthiness. Credit scores predict how likely you are to default on a credit account or loan; they're used to help set interest rates and terms.
What you may not know is that credit scores are just the start of the way financial institutions evaluate you, and they're not even the most commonly used scores -- far from it.
While a credit card issuer might check your credit scores once a month as part of its regular account review process, the same company probably checks other kinds of scores every time you pull out your plastic.
"Every single transaction has some sort of score being generated," said credit scoring expert John Ulzheimer, president of Credit.com's education services and author of the book "You're Nothing But a Number." "Generally they're checking whether the transaction is likely to be fraudulent, but there are other reasons as well."
You're being judged by the type of transactions you make, how you pay your bills, how much profit you generate for your lenders and a host of other factors. The scoring formulas might be created by the credit bureaus, third parties or the lenders themselves. Banks and other financial institutions are tight-lipped about many of the details of these other scoring systems, but they're used to determine:
* The kind of credit card offers you get.
* Whether your credit limits are raised or suddenly lowered.
* Whether your over-limit credit or debit transactions are approved.
* Whether your card issuer calls you about a suspicious transaction, blocks it or shuts down your account.
* How cooperative your issuer is about waiving fees or lowering your interest rate.
* How quickly your issuer calls you if your payment is late.
* Whether a collection agency contacts you about an old debt and how hard it pushes.
Your credit scores are just the start.
Here are some of the ways you might be scored, roughly following the life cycle of a credit account. You're very familiar with credit-risk scores, but the other eight rarely see the light of day.
Credit-risk scores: These are the credit scores most of us know. The leading credit score, the FICO, was created by Fair Isaac and ranges from 300 to 850, with scores over 700 generally considered to be low risk.
Response score: This score predicts the likelihood a consumer will respond to an offer of credit, such as a new card or a balance transfer offer. Credit card issuers use response scores to decide whom to target and how to customize offers to appeal to particular consumers, said Chisoo Lyons, vice president for analytic research at Fair Isaac, which created the leading FICO credit score as well as many other scoring formulas.
Application score: This score scoops up data from your credit application that's not included in your credit scores, said Ulzheimer, who worked for Fair Isaac and for credit bureau Equifax before joining Credit.com. That data include how much you earn, how long you've lived at your current address and how long you've worked for your current employer. Application scores are typically used in combination with other scores, such as credit and bankruptcy scores, to determine whether to open the account, what rate to give and how much credit to extend.
Bankruptcy score: Credit scores typically predict the chance you'll miss a payment in the next two years. Bankruptcy scores predict the likelihood you'll throw in the towel on your debt entirely and file for Chapter 7 liquidation or a Chapter 13 repayment plan, said David Rubinger, spokesman for credit bureau Equifax, which produces the leading Bankruptcy Navigator Index or BNI. BNIs range from 1 to 300, with the higher the score, the lower the predicted risk. Most lenders use both credit scores and bankruptcy scores, Ulzheimer said, to help assess the risk that you won't pay.
Revenue score: Lenders want to maximize the profitability of each account, and one way they do that is to gauge how much money each account is likely to generate.
Continue to 8 Secret Scores That Lenders Keep Part 2
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