Good news for all you big spenders out there! Here’s Reuters:
Credit reports now show if you regularly pay your credit cards in full every month – making you a low-risk “transactor” – or if you are a higher-risk “revolver” who carries a balance.
Some lenders use the information to determine what types of credit cards and loans to market to people, while others are starting to use the distinctions in decisions about whether to grant credit at all, as well as what rates and terms to offer.
Fannie Mae said on Monday it would require mortgage lenders to use this so-called “trended credit data” in loan decisions started in mid-2016. The change could help people with lower credit scores secure mortgages if they have a history of paying off their cards.
The fact that lenders didn’t already have this data would probably be surprising to a lot of people. Previously, credit reports would only show your available credit and (usually) the balance at the time of your cycle date. I say “usually” because at least one bank (US Bank, if memory serves) would report the balance as of the end of the month instead of using the cycle date.
In other words, somebody who bought $4,500 of gift cards on a $5,000 credit line and paid it off would look about as risky as somebody who was in the process of paying down a $4,500 debt on the same credit line. Both would show 95% (90%) credit utilization, which looks risky to scoring models. Additionally, if you’re using several different cards at a time, that behavior also appears riskier (compared to using one card) even if you’re paying all of them off, so hopefully that will be corrected for as well.
Note that changes to scoring models have yet to be implemented for the most part:
… Credit scores currently used in most lending decisions… do not distinguish between people who carry balances on credit cards and those who pay them off. The latest versions of the leading FICO credit scoring formula and its main rival, the VantageScore, do not incorporate payment trend data, those companies confirmed.
The three major credit bureaus Equifax, Experian and TransUnion, added payment patterns to credit reports two to three years ago, and researchers soon discovered that the differences in payment patterns are “very predictive” in determining who will default, Ulzheimer said.
“Revolvers are many times riskier,” Ulzheimer said. “It makes a huge difference.”
It will take some time for this data to get used in models, as changing credit scoring models and/or developing new ones is a resource-intensive process. I would guess that credit scores will tick up a bit for hard-core churners, as most of us (I hope) are pretty good at managing credit responsibly.
Veteran ms’rs should already be paying their balances off before statement closings so reports show no balances. Some suggest leave a $1 or $2 balance on so there’s some utilization, but many don’t. If you pay it off after the statement closes, but before the due date, reports will show heavy utilization, so this new rule/suggestion might help those people.
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Over the years (on and off starting in the 90’s) I’ve used quite a bit of cheap balance transfer money, earning very good returns in the process. Usually this meant carrying a balance at 0% for 12-18 months and paying it off or moving it to another card when the end of the offer rolled around.
It sounds like banks who use this data could make that much harder to do.
Let’s call it “90% utilization” since it’s 90% and all.
Will it really look less risky? Now lenders will know how much you are spending each month. If you balance closes at 5,000 and then its reported the next month that you paid off your previous months balance but your new balance is also 5,000, then lenders will know you spent at least 5k. This would look risky on a 60k income. I guess you would avoid this by paying your balance before your statement date.
@dave, but, as long as it’s paid down to zero each month, why would the creditor care? You’re clearly a good risk.
For MSers it might look sketchy. For example, if you list income on a credit application of 40K per year but your credit report documents that you typically push 50k to 100k through your credit cards each month. That sort of thing may be perceived as more risky than someone with a more normal spend pattern for a 40k income.
What if it is a business card and you have a business license. Your income is from profits so if you do not have much in profits, you can spend a lot to earn a little.
lol. Yep it’s indeed 90%
Fixed. Thanks!