The Wall Street Journal
Credit Scorers Find New Ways To Judge You
Alternative Measures Use Rent and Utility Payments
To Assess Risk of the Debtless
By JANE J. KIM
March 11, 2008; Page D1
Don't be surprised if a lender wants to know if you pay your rent on time or bounce checks before it will let you borrow money. For many years, loan approvals were determined largely by borrowers' credit scores, which are based on proprietary formulas that include such things as debt levels and loan-payment histories. Now, lenders increasingly are looking at other factors, such as rent and utility payments, to determine whether potential borrowers will make good on their loans. The financial-services industry began this push so it could lend more to the estimated 50 million Americans -- including many immigrants, young adults and seniors -- with little or no credit history. But as the economy slows and default rates soar for home mortgages, more lenders are using these same tools to evaluate the credit-worthiness of the broader population.
Today, credit bureau Experian Group Ltd. plans to announce an alternative credit score to help lenders get a better picture of how people with little or no credit might handle a loan. Competitor TransUnion LLC rolled out a similar product this past summer, while Fair Isaac Corp., developer of the widely used FICO score, broadened its Expansion scoring system in November to include more information about monthly rent and utility payments, among other data.
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All this means that consumers should pay closer attention to whether they pay bills on time or write bad checks. More lenders will study such factors when they price loans or reset credit lines on existing customers, particularly those with lower credit scores... Yet the new scores could be good news for those who pay their bills promptly but don't have established credit histories. In the past, banks often ignored this group because they had no way of evaluating the risk. The Center for Financial Services Innovation estimates this group could generate between $6 billion and $45 billion in new loans each year.
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The alternative scores developed by the credit bureaus and other financial-services firms rely on a combination of their own data, as well as third-party databases. TransUnion and Experian have teamed up, respectively, with L2C and eBureau LLC, which specialize in collecting and analyzing alternative payment data. Equifax Inc.'s MarketMax score, meanwhile, pulls information from electronic database LexisNexis to verify consumers' identities and sift through public records for tax liens, bankruptcies or criminal records, in addition to using other data.
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