New Trends in Credit Scoring

Fall journey on to new trendsNew Trends in Credit Scoring

A fall journey to an improved credit score may soon be just be a few key strokes away.

The current system of determining a person’s creditworthiness is “inadequate and insufficient” and is costing both consumers and creditors, said Zaydoon Munir, founder and CEO of RevolutionCredit, in an article by CNBC’s Cadie Thompson.

In response, the 2-year-old start-up is using online finance crash courses to help lenders better determine a person’s creditworthiness.

“Traditional credit scores use one type of data, transactional data, and it is backward looking. They are reporting on something that has already happened. It always assumes the future will look like the past and humans don’t operate in a straight line,” Munir, a former Experian executive, said.

RevolutionCredit, whose backers include the former CEO of FICO and the founders of FreeCreditReport.com, is using its financial testing software to capture people’s behavioral data. That information is harnessed to create a more accurate credit profile for the consumer.  The behavioral data the software captures is what Munir describes as “a consumer’s intent and their aptitude.”  It works like this: A person with a 650 credit score comes to a bank’s website and applies for a credit card. They are then made two offers:

1).  a $5,000 line of credit at 12%, or
2).  a $7,000 line of credit at 12%. To qualify for the second offer, however, the applicant must first complete an online financial course.

A person who takes the course and completes it shows intent, which is positive behavioral data that can be used to help determine their eligibility for more credit. How a person scores on the test is considered their aptitude and is also a factor in helping them get more credit.

These applications aren’t just beneficial to the customer, it also aids the creditor because it helps them tap a new market of people who may be unfairly marginalized because of a blemish on their credit report, Munir said.

“There is this broad middle of consumers and they all look different. They don’t all arrive at the 650 credit score for the same reason,” Munir said.

“I don’t look at it as a zero sum game,” Munir said. “I want to add transparency to a system that is otherwise opaque from a customer standpoint. The consumer has no idea what you are using to judge them and to basically hold against them.”

Services like RevolutionCredit will probably work best for smaller loans like credit cards or auto loans, where the risk of default is real but the stake is much smaller than a mortgage or business loan, Rogers said. And it could be especially useful in getting millennials more credit, he added. (Ben Rogers, research director of Filene Research Institute, a credit union and consumer finance think tank.)

“Demand from borrowers, especially millennials, is surging for on-demand services of every kind. This is especially true for credit applications, where new borrowers don’t know all the rules of the road and don’t want to seem clueless. It’s less embarrassing to learn from a screen than from a person, even a nice one,” Rogers said.

“People’s wallets are most often the most sensitive part of their anatomy. If they don’t have to go in and look at somebody face-to-face, well, I think there is a lot to be said about that. Will it change the world? The jury is still out, but these on-demand services have a lot of potential.”

Currently, only a few companies have reported using this system. It may be some time before others use it. Most banks are slow to change, and the current system is working for them (but maybe not for you). If you receive a credit offer as described above, take advantage of the free education and improved terms!

In the meantime, if you are applying for a mortgage, other high-ticket item, or need to improve your credit score due to applying for a new job, call us to learn more. We’d be happy to help you with a FREE, no obligation evaluation.

Check out our website at www.BrightPathFinancialCorp.com; sign-up for our free newsletter and learn more.

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