How Lenders Use Your Hidden Credit Score

AlamyBy Hal Bundrick

Is the National Security Agency really tapping your phone calls and reading your email? If they are — in spite of the invasion of privacy concerns — the truth is, it’s probably some pretty boring stuff they’re snooping in on: “Want to meet for lunch?” “Justin Bieber got arrested?” “Who’s the new guy in accounting?” That sort of stuff.

The real data that matters is much more personal. Lenders use it, and you should know about it. It’s your hidden credit score.

Lenders Easing Credit Standards

After years of suffering, consumer credit is gaining giant momentum. Crawling out from the rubble of recession, lenders are looking to make deals.

The “too big to fail” banks have been mopping up lingering legal messes, and the mortgage industry is still in recovery. But consumer-focused lenders have been easing credit standards and swimming downstream to gain retail customers and pump up profit margins.

These mostly smaller lenders are finding a good deal of opportunity with consumers who have less-than-perfect credit. But they don’t depend solely on your traditional credit score. They need more than that.

Subprime Time

The term “subprime” has become synonymous with the U.S. financial crisis of 2008. Tied to the manic mortgage industry that fueled the economy in the early 2000s, subprime loans were packaged as derivative investments and ultimately caused the collapse of the house of cards that was the American economy.

But subprime lending — issuing loans to consumers with FICO credit scores of 660 or below — is making a comeback. And rather than causing concern for another crisis, it’s helping credit-critical consumers rebound from the recession.

It’s also feeding the heat of a resurgent automobile industry. The credit bureau Equifax (EFX) reports that auto loan volume was at an eight-year high last year, and nearly a third of those loans were issued to subprime borrowers.

For Americans with complicated credit histories, the opportunity for a financial reboot should continue for awhile longer. Moody’s Investors Service (MCO) says subprime borrowers can expect the favorable lending environment to continue through at least the end of 2014.

Alternative Credit Data

How are lenders managing credit risk when dealing with consumers with low credit scores? It’s all a function of big data — the term given to the collection and interpretation of a multitude of data gathered from a variety of sources.

In effect, it’s a hidden credit score, built upon a “predictive risk” rating generated from non-traditional payment histories. That means rather than simply examining typical revolving credit accounts and personal loan histories, lenders are looking at payment behavior tied to cellphone, landline, utility and cable and satellite TV payments.

This data provides insight into millions of consumers with “thin files” — meaning potential borrowers with little, no or recovering credit histories. In fact, a reported 25 million consumers are nowhere to be found in traditional credit files, according to Equifax. Alternative credit information allows lenders to serve this previously untapped market.

Credit reporting agencies know more about us than most consumers would believe — from income information and your home address, to public records and wealth profiles. All this information serves to develop our credit risk rating that is provided to subprime lenders, and it is driving the credit-bruised consumer lending boom. As privacy intrusive as the practice may seem, it can work to your advantage.

An Excellent Time to Repair Your Credit

With relaxed credit standards and motivated lenders using alternative data to close a deal, Americans who have seen their credit ratings sag can use this rare opportunity to restore their credit score.

Making a sensible purchase in this easy-credit environment will allow you to begin rebuilding a positive credit history. Timely payments, combined with careful management of your debt load, will help your credit score rebound. It takes time, but most of us don’t need to overload our credit capacity anyway.

Knowing the information is out there can give your credit file a counter-intelligence edge.

Hal Bundrick is a certified financial planner and former financial adviser and senior investment specialist for Wall Street firms. He writes about retirement accounts and personal finance for NerdWallet.

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