During yesterday’s episode of The Personal Finance Hour, Jim and I spoke with Liz Pulliam Weston, financial columnist and credit score expert. Weston provided background on how the credit scoring system works, and offered tips for how to maintain (and improve) your credit score.
During the show, Weston mentioned a past MSN Money article in which she wrote about 8 secret scores that lenders keep. These lesser known (and confidential) scores are also a part of your credit profile:
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.
Weston enumerates eight other scores that are used to evaluate you as a borrower:
- Your response score predicts how likely you are to respond to an offer of credit, such as a credit-card offer in the mail.
- Your application score contains secondary information that’s not factored into your credit score. This is like a reinforcing piece of information.
- Your bankruptcy score is just what it sounds like: a measure of how likely you are to declare bankruptcy.
- Your revenue score indicates how much money a lender is likely to make from you as a borrower.
- Your attrition-risk score measures how likely you are to close your account. Lenders use this in combination with other scores to decide whether a customer is worth retaining.
- A behavior score is like a credit score, but applies to only one account. Each account has a behavior score, which reflects how you handle the account.
- A transaction score is generated for each purchase you make, and is used to determine whether the transaction should be approved. (Or whether it might be fraudulent.)
- If any of your accounts is sent to collections, your collection score predicts how likely you’ll be able to pay your debt.
For more detailed information about these “secret” scores, read the entire article at MSN Money. And for more information from Liz Weston about the ins and outs of credit scores, listen to yesterday’s episode of The Personal Finance Hour (also avaialble on iTunes).
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First your score is used to determine your auto insurance rates, and now it could determine your marriage prospects.
Damn.
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That anecdote is certainly an off-putting one.
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Wow, no kidding, I was enjoying the article until I got to that little anecdote. Andy sounds like a tool.
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Er, I think something got lost in translation there. That anecdote is meant to be good-natured and fun. I don’t get the impression that Andy is a jerk, and it seems that his girlfriend (now wife) didn’t think so either. I’m removing the anecdote from the post and moving it here to the comments instead! I don’t want it to detract from the main point of the post. My bad.
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Here’s the bit that I moved from the post to the comments:
Andy Jolls of VideoCreditScore shared a fun story on the show: “On our third date, I had Molly pull her credit score,” Jolls said, speaking of his then-girlfriend. “I knew that she had credit card debt, and that was concerning to me. But when she pulled her scores, her scores were actually good, so I knew that she had pretty good discipline.” And now Andy and Molly are married!
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I listened to the show, and to better appreciate anecdote about Andy, it’s worth noting that he said he was working for myFICO at the time, a division of Fair Isaac, the inventors FICO scores. Kind of like how a dermatologist might pay extra close attention to their date’s skin.
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Kind of like how a dermatologist might pay extra close attention to their date’s skin.
Or how my sister-in-law, a dental hygienist, evaluates people based on their teeth. (Much to my detriment.)
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Fairly interesting post – I had no idea that all these scores were being kept behind the scenes.
It’s just a little bit funny that as consumers, we think we have so much power because our credit agencies are “transparent” and we can pull up our reports and scores at any time and have a fairly good idea of how they’re calculated.
Little did I know (okay, so call me naive) that it’s not the case at all!
Bummer.
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I was recently at the bank looking for a small loan to buy a truck, and my bank rep said she had to check my credit score – I knew that was coming and it was fine. AFterwards, she told me what it was (I already knew b/c i check it fairly often) and said that my ‘bank score’ was good too.
I asked her what it was, and what that meant, and she kind of clamed up like she wasn’t suppsed to share that information with me.
Was strange. I wonder if it was like the ‘revenue’ score mentioned above.
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Interesting articles.
One thing stands out in every article on credit scores is the secrecy of how they are calculated. Basically, it comes down to the fact that if you use due diligence in handling your credit, the credit score will take care of itself.
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Sub-scores under “behavior scores” might also include your mortgage score and your auto loan score. I knew a mortgage broker several years ago who told me about these, saying to remember that a credit score is like a score on the ACT. It’s a composite of how you pay all your creditors, much like the ACT is a composite score based on science, math, reading comprehension and writing abilities. Mortgage companies are really more interested in how much importance you place on making your house payment, auto loan companies in how well you value making auto loan payments. They have individual scoring mechanisms to determine these numbers.
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Hey, I don’t know that I’d consider it third date material, but, since my potential husband’s ability to handle money and finances is a serious issue for me to consider, it is something that is a factor for me in a relationship that seems to have the potential to be marriage-bound, too. How many divorces are born from fighting over money? I’d rather make sure we’re on the same page there before we unite our lives (and finances).
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What I never understood is why American consumers accept playing this game at all. What’s the point ?
If you live halfway sensibly, you don’t *need* credit for anything other than buying a house. And when you do, any bank should be willing to look at the actual state and history of your finances and give you an offer.
Assuming you’re borrowing well within your means (which you should ANYWAY) then you’re good business; the banks will want to compete with eachothers for your bussiness. So you end up getting a offer close to the lowest available interest. End of story.
FICO is a joke; it measures not how credit-worthy you are, but rather how much money a bank is likely to make on you as a customer. Someone with no credit-card will score lower than someone who’s constantly in credit-card debt. (aslong as the latter consistently pays the bills on time)
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What I never understood is why American consumers accept playing this game at all. What’s the point ?
If you live halfway sensibly, you don’t *need* credit for anything other than buying a house. And when you do, any bank should be willing to look at the actual state and history of your finances and give you an offer.
Assuming you’re borrowing well within your means (which you should ANYWAY) then you’re good business; the banks will want to compete with eachothers for your bussiness. So you end up getting a offer close to the lowest available interest. End of story.
FICO is a joke; it measures not how credit-worthy you are, but rather how much money a bank is likely to make on you as a customer. Someone with no credit-card will score lower than someone who’s constantly in credit-card debt. (aslong as the latter consistently pays the bills on time)
OH! You’re my new favorite blogger fyi
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These “hidden” scores are one of the things the banks, and many other lending institutions are under fire for. Many of these hidden scores will become less hidden with the news rules. Hence the big fight on the part of the banks.
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@ Gunnar
Don’t mistake a good risk with good business. Having built all of these types of models and more while working for a credit bureau, I can assure you there is a difference in profitability between good credit risks and bad ones.
Contrary to popular opinion, the money is made on the bad credit risks.
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Very interesting indeed! Thanks for sharing!
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@Gunnar: Unfortunately Americans are conditioned practically from birth to be “good consumers”. We are constantly bombarded with commercials designed not only to sell specific products, but also to sell the idea that we “need” or “deserve” all the impulse purchases we see. Many Americans have gone from the assumption that debt is something to be avoided, except in a few specific circumstances (such as a car or home purchase) to the assumption that debt is a part of life, and that we shouldn’t be concerned over being mired in it from the time we turn 18 until the day we die.
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My comment edits weren’t saved
There are other model types including:
cross-sell/up-sell – determines if your are likely to respond to additional products/offers from the lender
Income predictor – let’s face it, consumers have a tendency and incentive to inflate their income. This score provides a reasonable range of income that can be expected.
Funded models – predict how likely you will activate the credit line once granted
Claims models – predict the liklihood you will file a claim. Insurers primarily use this.
Claims amount models – used in conjunction with claim models to estimate the likely amount of claims made.
Application Fraud models – determine the probability a credit application is likely fradulent. Whether by identity theft or identity creation with the intent of theft from the lender.
Blended models – these can contain any combination of those listed here or in the original article.
As a consumer I honestly don’t worry about these “Secret Scores”. The reality is they allow lenders to charge lower rates in aggregate since they are able to better price their risks and maintain profitability. Quite frankly many of these also operate in my interest by protecting my accounts and cutting down on junk mail.
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Credit scoring is just a means for keeping you scared. Let them keep score if they want to, but you don’t need to know your numbers. The important thing is that you manage your money (including savings, investments, and debt) well. Knowing where you fit on some ARBITRARY scale should not change your behavior.
Please stop giving them power over you. Do the right thing and live your life.
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I do some scoring of my own….companies that send me annoying solicitations lose points. Companies that pass me by because I hate debt and pay my bills promptly also lose points. Companies earn points for good products and good customer service. Vote with your dollars.
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