New Study Highlights Need For Increased Credit Literacy

Originally posted on CUInsight.

By Randy Salser, President, NAFCU Services

As the availability of credit reports has become more convenient due to the pervasiveness of the Internet, knowledge of credit scoring still suffers. The National Credit Score Knowledge Survey results were released this month by the Consumer Federation of America (CFA) and VantageScore Solutions.  Among the surprising findings in the study:

  • While 80% of respondents consider their knowledge of credit scores to be good, fair, or excellent—94% of participants do not know which factors are among those used to calculate a credit score
  • Only 7% know that neither FICO nor VantageScore will lower one’s credit score if multiple inquiries are made during the same two-week window
  • Only 50% of respondents understand the three instances when lenders are required to inform borrowers of the credit score used in the lending decision
  • 53% of millennials surveyed don’t know that age is not used in calculating credit scores
  • Only 50% of millennials surveyed know that credit repair companies are rarely helpful in fixing credit scores
  • 51% of millennials surveyed have not obtained a free copy of their credit report, while 74% of older adults have obtained a free copy of their credit report

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Who Are “The Unscoreables”? Hint: It’s Not Who You Think

Shortly before the NAFCU annual conference, David Frankil (who needs no introduction to readers of this blog), wrote a post titled, “Is Your Credit Union’s Lending Universe Expanding?”

David’s post was a terrific explanation of how important it is for credit unions to expand their borrower pools in order to keep ahead in an increasingly competitive consumer credit market.

A basic requirement for that expansion is a credit score, which needs a history of credit usage. Some credit score models require very recent credit usage, such as activity on at least one account at some point within the last six months, in order to generate a score. In other words, whether a member has one credit account (e.g., a credit card) or many credit accounts, if there isn’t any activity on at least one account during the most recent six months, that member may be invisible to you when they seek new credit; the credit score model may not recognize their credit history over the past six months and thus may be unscoreable.

Members who are new to the credit market such as recent high school or college graduates, divorced or widowed members or newly arriving immigrants have similar challenges obtaining a credit score for a different reason. Consumers cannot receive a credit score under some traditional models until after six months of reported payment history.

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Is Your Credit Union’s Lending Universe Expanding?

Originally published on CUinsight.com.

No, this is not a survey to see who the Trekkies are among us, nor is it an analysis of what the Higgs-Boson particle means for banking.

You can certainly grow the pool of lending opportunity by adding new members, but a component of any lending strategy has to be doing more lending to existing members. There are many factors which can dictate segmentation of and the ability to expand further into your target markets, including demographics, income levels, credit scores, and others. Some are exogenous, i.e. outside of your control.

Demographics are one example – your member’s age is your member’s age, and nothing you can do is going to change that fact. The same is true for income levels – they earn what they earn, and unless you’re going to send them checks every month that isn’t going to change either.

On one level that is also true for their credit scores. Their credit related activities are interpreted in order to generate a score that you use to help assess credit-worthiness, and improvements in that score are really dependent on behavior changes and other actions taken by the member.

But a closer look reveals that there are some things you can do related to your usage of credit scoring models that can help expand your universe of opportunities.  One of the common issues associated with some traditional credit score models relates to their methodology, and what they include and exclude to generate the score. I’m sure that all of you at one time or another have had to say no to someone you knew was a good credit risk, all because their score did not meet minimum underwriting requirements.

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