You have reached your limit of free articles this month.

Enjoy unlimited access to myAJC.com

Starting at just 99¢ for 8 weeks.

GREAT REASONS TO SUBSCRIBE TODAY!

  • IN-DEPTH REPORTING
  • INTERACTIVE STORYTELLING
  • NEW TOPICS & COVERAGE
  • ePAPER
X

You have read of premium articles.

Get unlimited access to all of our breaking news, in-depth coverage and bonus content- exclusively for subscribers. Starting at just 99¢ for 8 weeks

X

Welcome to myAJC.com

This subscriber-only site gives you exclusive access to breaking news, in-depth coverage, exclusive interactives and bonus content.

You can read free articles of your choice a month that are only available on myAJC.com.

Using better credit data to help borrowers


In late September, Fannie Mae made one of the most significant changes in decades to how it evaluates the creditworthiness of applicants for home mortgages.  As part of the underwriting process, it will now review trended credit data, which is effectively the repayment history of how a particular consumer services their debt. 

In the short term, this change could benefit a significant number of Americans that apply for a mortgage. The introduction of this new way of assessing consumer credit data comes at a time that is especially relevant given the recent report by the Federal Reserve that over the last decade there has been a decline in mortgage lending opportunities for minorities.

In the long term, it could have a larger significance, encouraging more consumers to manage their credit wisely and transforming the very way lenders assess risk. However you look at it, the change will be transformative to the mortgage industry and further illustrates the important role the credit industry plays in the U.S. marketplace.

In 2003 consumers began to obtain their annual credit report at no cost. Millions of Americans became familiar with the vital role a credit report plays in determining their ability to obtain financing. The report, which each of the three major credit reporting agencies maintain independently, typically shows how much a consumer has borrowed, their total available credit, how much debt they have outstanding, and any delinquency in payment history. A snapshot of a moment in time.

The traditional credit report has been fairly static, as they do not include other key data sets that provide major insight into a consumer’s ability and willingness to pay their bills on time, which has become more important as the country has moved closer and closer to a cashless economy.  The inclusion now of up to a 24-month  transaction history will add a new level of sophistication that will provide better ways to assess a consumer’s ability to afford, manage and repay loans.

Another way to think of the change is if you were to imagine having a photograph and then discovering video.  All of sudden, the credit report has become more dynamic and lenders and other credit providers move closer to a 360 degree view of a consumer, which will benefit both consumers and lenders.

This “new view” will be translated in a couple of ways with consumers holding credit cards and other revolving monthly accounts largely falling into two categories:  transactors and revolvers. “Transactors” are those consumers who pay their credit card accounts in full or in large part every month, while “revolvers” are those who only pay the minimum amount due.

Historically, credit reports couldn’t differentiate between those two types of consumers because reports only showed a snapshot in time. As a result, a consumer who paid their balance in full every month might appear to have the same level of creditworthiness as one who only paid the minimum owed, if both reports were obtained at the same time.

The actual creditworthiness of those two consumers, however, could be dramatically different.  Research has shown that borrowers who pay off their credit card every month are 60% less likely to become delinquent than borrowers who make only the minimum payment each month.

Trended credit data will begin impacting the mortgage market this year. But over the coming years it will likely be used by more lenders in other loan categories looking for better assessments of borrowers’ creditworthiness. Ultimately, trended credit data will likely impact not just whether borrowers are approved for credit, but also the interest rates they receive.

This modernization of the credit market, through innovative ways at analyzing credit data, could especially help low-income Americans, many of whom struggle to access credit today due to thin credit files. By revealing a more thorough picture of their payment history, approaches like using trended credit data would increase responsible borrowers’ chances of being approved for a loan to buy a home, start a business, or send their child to college.

Of course, there will always be naysayers who believe any expansion of the credit market jeopardizes the economy, by bringing into the system new borrowers who will eventually default on loans. But the use of trended credit data shouldn’t be used to extend credit to undeserving borrowers. Instead, it should help lenders find deserving borrowers whose traditional credit data might not show a full picture. In fact, the use of advanced analytics and trended credit data could actually reduce risk to the U.S. financial system by allowing creditors to assess risk more accurately.

Most Americans have little understanding of how the credit market works, which is why consumer advocates encourage everyone to obtain their free credit report once a year and examine it closely. By knowing what lenders see, consumers can modify their behavior and help improve their chances of accessing credit. The incorporation of trended credit data into those reports gives consumers more information about how to help improve those chances than ever before.

 Today, credit is powering the world and our part in it is a role we do not take lightly.  It is one that requires us to strive to look at innovative ways to leverage the data we are entrusted with for the benefit of the economy, consumers and businesses.  As the marketplace evolves, so must we.  Your grandfather’s credit bureau is a thing of the past and we are proud to be part of this latest innovation within the credit industry, certainly one of many more to come.

Trey Loughran is chief marketing officer, Equifax.


Reader Comments ...


Next Up in Opinion

After 23 years as a K-12 parent, I’m done. Five parting tips for schools.
After 23 years as a K-12 parent, I’m done. Five parting tips for schools.

My twins, the youngest of my four children, graduate high school today, ending my 23 year relationship with K-12 public schools in Georgia. I have been packing lunches, going on field trips and collecting for teacher gifts since August of 1993. My calendar is now cleared of curriculum nights, book fairs and school concerts. High school graduation...
School awards should not treat student differences or struggles as punchlines
School awards should not treat student differences or struggles as punchlines

I remain dismayed over end-of-the-year student awards that are insulting to the recipients and wish schools would end the practice now. If students want to informally present each other with mean-spirited or so-called joke awards, they can do so on their own time; it should never be allowed at a school-related event. And certainly teachers should...
Opinion: ‘Study’ about tax credit scholarships taxes logic

I have written before about the special fervor with which school-choice opponents attack tax-credit scholarships in Georgia and other states. The latest example is a “study” by the national lobbying arm of school superintendents. The operative word here is “lobbying.” The School Superintendents Association does not want Congress...
Readers Write: May 25

Why is U.S. happy with education status quo? In the modern society where science and technology is changing life so fast, education — the right kind of education — is absolutely essential. The basis for college education begins in the elementary school and it is only in the last year or two of high school that students make a choice for...
Opinion: Why terrorists attack concert halls
Opinion: Why terrorists attack concert halls

When a suicide bomber detonated explosives in the Manchester Arena in the United Kingdom, killing concertgoers as they filed out of pop star Ariana Grande's show, he joined a particularly insidious tradition of attacks on entertainment spaces. The killers who carry out such acts of terrorism aren't simply launching assaults on Western culture. They're...
More Stories