Lesser Known Scores That Businesses Use
Posted on June 10, 2011
Most consumers realize they have a credit score – a number that indicates whether you have good or bad credit. It’s a number creditors and lenders use to decide whether to approve your application and what interest rate to give you. But, there are several other scores businesses use that aren’t as publicized. Some of them are not even available for consumer use.
Your credit card issuer has a wealth of information about your shopping habits and uses this information to determine just how risky of a borrower you are. Creditors may use your behavior score to determine your limit, to raise your interest rate, raise your annual fee, or cancel your credit card all together. Using your card at certain places, like pawn shops, can make you seem riskier.
Because card issuers don’t share the score, or the factors that influence the score, it’s impossible to raise your score. Cutting back on your plastic utilization used to share your behavior score can negatively affect you too – creditors may misinterpret the reason you’re using your credit card less.
Banks use your bankruptcy score to predict the likelihood that you’ll file bankruptcy in the near future. They may use your bankruptcy score to charge you higher interest rate or fees or to deny your application all together. Lenders want to avoid borrowers you could file bankruptcy because it means they’ll lose money on the loan. The use of bankruptcy prediction scores may be beneficial for borrowers who don’t post a bankruptcy risk since it means lenders don’t have to raise rates on everyone to compensate for other losses caused by bankruptcy.
Insurance Risk Score
Insurance companies use your insurance risk score to determine your insurance premium. The score is based on information in your credit report. Negative credit report information will often cause you to have a higher insurance rate because a correlation has been made between low credit scores and number of claims filed. CreditKarma.com recently started offering the insurance risk score for free to consumers who also view their free TransUnion credit score.
The mortgage score is used to predict the likelihood that you’d default on a mortgage and have your property foreclosed. While lenders can use your credit score to evaluate your mortgage application, the mortgage score hones in on criteria that better predicts the potential timeliness of your mortgage payments.
Strategic Default Score
FICO, the company who generates and sells the FICO credit score, recently released a score that helps banks predict which homeowners are at risk of strategic default. Strategic default happens when homeowners simply walk away from their mortgages, typically because the value of the home has fallen significantly below the mortgage amount. Strategic defaulters have good credit scores and can afford their mortgage payments, but choose to walk away from the mortgage to keep from sinking any more money into an investment that’s losing value. Lenders could use this score to identify and contact homeowners who are most at risk of walking away from their mortgage.
These are just a few of the scores banks and other businesses use to make decisions about you. Chances are, there are more scores out there we don’t know about that are used to qualify or disqualify us for loans and other services.
Image credit: flickr
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