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These days the major credit reporting agencies aren’t just satisfied looking at whether or not you make your payments to creditors on time. They are also factoring in patterns of behavior, such as whether or not you like to carry a balance on your credit cards and how long it typically takes you to completely pay off a balance.
This analysis has become easier and more affordable for credit agencies to implement thanks to fast and powerful digital technology and software that can analyze incredible amounts of data at record speed. Lenders see this as a valuable tool to help them identify consumers who are at greater risk of default, while also discovering which customers are the most dependable when it comes to repaying their debts quickly and consistently.
What the Data Shows
Analyzing payment trend data offers new insight that old credit scoring models were not able to provide. For example, those who don't carry a balance are three times less likely to default. So if you go shopping this holiday season, run up a high balance and then take a long time to pay it off, lenders will see you as a high-risk borrower.
Credit reports now show, for example, who regularly pays off their plastic each and every month – and who is in the habit of carrying a balance. These folks who like to carry a balance are referred to in the banking industry as “revolvers,” because they cycle what they owe from one month to the next. Those who pay off their balances each month are known as “transactors.”
TransUnion has started looking at much longer timeframes to spot these kinds of payment or debt-carrying patterns. They may track the activity of someone over a period of 82 months – nearly seven years – versus the standard monitoring of payment patterns over just 48 months. With this kind of more comprehensive scrutiny available, banks and other lenders are able to apply it to their own policies and decisions to minimize risk and maximize profitability.
The Future of Credit Scoring
The “big three credit bureaus -Equifax, Experian, and TransUnion- began using these patterns in their reports two or three years ago and many banking experts say that it is much more accurate in predicting credit risk. The upside for consumers is that those who are really good at paying off their credit cards and other balances promptly and consistently will likely see their credit ratings rise.
Not all lenders are using these more advanced credit reporting systems yet, but the trend will likely pick up momentum going forward. The big mortgage company Fannie Mae has already said that in 2016 it will require its mortgage lenders to use this kind of pattern-based credit reporting.
Mind Your Utilization
All of this is yet another reason to pay very close attention to your “credit utilization ratio” – which is a fancy way of saying the portion of your available credit that you are using. Creditors love consumers who have open lines of credit, but don’t utilize the entire credit line or get near the limit.
If you want to keep your credit golden, try to use no more than about 30% of the credit offered to you. Use the utilization formula to determine your utilization ratio.
The logic for banks and credit card issuers is simple – if you are borrowing a bigger portion of what is available to you it may mean that you are having trouble paying down your debts or managing a budget, which increases the likelihood that you’ll miss a payment.