Loan applicants at opposite ends of the credit score spectrum make for easy loan origination decisions. Superprime can be approved in seconds and offered the best terms to increase the probability of capturing the loan. High-risk applicants below a 500 score are likely to be issued an auto-decline. Applicants who fall somewhere in between subprime and prime usually require a bit more consideration to review their credentials and financial positions.
Trended Credit Data Reports and the Limitations of Credit Scores
Yes, a credit score can be powerful. The number can provide immediate guidance. However, there are inherent limitations when focusing almost exclusively on that single attribute. Although the number is calculated using complex algorithms that evaluate an individual’s tradelines, it says little about historical transactional trends that reveal a consumer’s improving, declining, or static financial position.
Recognizing this limitation, and using the abundance of historical credit card data available via widespread e-commerce, the major credit bureaus now provide lenders with trended credit data reports to complement traditional credit scores. Trended data reports give lenders greater confidence when evaluating risk. Let’s illustrate the benefits by a few trended credit data report examples.
Up to Thirty Months of Payment History
A trended credit data report can provide up to 30 recent months of payment history. Monthly data regarding balance, high credit, minimum payment due, actual payment, amount past due provide useful insight into consumer financial behavior. The cardholder may be a “transactor” who immediately pays the full amount due every month, and therefore a good credit risk, or a “revolver” whose outstanding balance fluctuates significantly and rarely makes a full payment.
When consumers have multiple credit cards, additional insight is gained regarding financial behavior. Consumers may transfer balances from several credit cards to consolidate payments, get a better rate or earn points. Payment data may also show seasonal trends and a high utilization rate that could stress a consumer’s ability to pay. With dozens to hundreds of historical data points to evaluate, payment trends give lenders a clearer picture of consumer behavior.
Credit Score Doesn’t Always Reflect Current Financial Position
Payment trends provide context for evaluating borrower risk. Several applicants may have similar credit scores, but the payment history reveals different financial positions for each applicant.
Taking on debt: The applicant assumed an additional $25,000 in debt during the past 6 months, and payment data indicates the applicant is paying only the monthly minimum on each of the 4 cards carrying this debt. Although the applicant’s credit score indicates a prime borrower, payment trends indicate the lender should rate this applicant as a higher risk.
Reducing debt: The past 24 months of payment data show the applicant has finished paying off a $10,000 balance, accomplishing this by paying an increasingly larger amount each month. Payment data from a second credit card indicates a “transactor” consistently paying the amount in full. This applicant’s credit score was at the top end of the prime category. Based on payment data, the lender should structure a deal more in line with a low superprime borrower.
Consistent Payments: This applicant shows a utilization rate that averages slightly over 50% during the past 30 months, but consistently makes the full monthly payments. With neither declining nor improving financial position, in this case, the payment trend confirms the applicant matches their credit score and presents a good risk.
Each of these trended credit data report examples illustrates the value of using detailed information to assess applicants with greater accuracy during loan origination. Trended credit data reports let lenders identify lending opportunities such as subprime scores with an improving financial position that may have otherwise been ignored. Trended credit data also helps avoid risk like applicants with prime scores who have recently taken on greater debt.
Easily Incorporate Trended Credit Data Reports Into Your LOS
Trended credit data reports are available from the same three major credit bureaus that lenders have relied on for decades. Notably, TransUnion provides up to 30 months of account history to understand a consumer’s risk trajectory and make educated lending decisions with confidence. Modern loan origination solutions allow lenders to easily integrate trended credit data reports into their LOSs and use automation and decision rules to further optimize lending decisions.
Learn more about these capabilities and benefits in the How to Use Trended Data in Your Loan Approval Process webinar.
In an increasingly competitive lending market, lenders need every resource they can get to make the right loan origination decisions. Trended credit data reports are essential resources that give lenders a clearer picture of a consumer’s financial position, revealing new lending opportunities while reducing risk.
defi SOLUTIONS software experts can help you use trended credit data to improve your loan origination process. You’ll have greater confidence in lending decisions while reducing risk. Take the next step by contacting our team today or registering for a demo of defi LOS.
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