What Hurts Your Credit Score Management: Guide for Lenders & Borrowers
What brings your credit score down? Debt consolidation, hard inquiry, bankruptcy, customer service calls, and so on. Surfing the web, you can find up to 20 ideas considering things hurting your credit score. However, banks and alternative lenders may don’t even care about half of them.
In this article, we decided to dispel the doubts concerning credit scoring methods. We will discuss the most significant factors that banks should take into account. Besides, there is a guide for banks and financials on how to score the capacity of their lenders to repay loans, and what credit scoring models to choose.
What is a Credit Score?
A credit score is, traditionally, a three-digit number from 300 to 850 that shows your trustworthiness to lenders. The score is calculated using the information in a credit report, such as payment history, its length, and current debts you have. Credit scores are used by creditors and commercial lenders, including banks, government agencies, credit card companies, mortgage lenders, and others. It’s a deciding factor whether to offer a loan or credit card or not.
It’s important to mention that there are a variety of credit scoring models, so organizations might use other data to calculate credit scores. Besides, a three-digit score is, mainly, used in the U.S. and is not a world standard. Thus, there is no opportunity to answer what is a perfect credit score, because it varies from country to country.
What Hurts Credit Score Management in Banks
Businesses seek to modernize traditional credit scoring methods thereby lowering clients’ credit ratings. Fintechs implement AI and ML technologies expanding credit risk modeling. They widen a list of things affecting credit scoring, adding various transactional behaviors. For example, frequent late-night cash withdrawals, regular large expenses, social media activity, political inclinations, or a number of times you contact customer service. But is there any point in checking every borrower in detail? A definite NO.
It’s believed that the more information you analyze, the more detailed risk model you get. But in credit scoring, it doesn’t work. According to the research by Intertrust Group, 18% of respondents believe that a broader range of data exacerbates the credit decision-making process.
- 36% claim that we need to restrict the information included in a credit assessment and make the legislation tighter to protect borrowers’ rights.
- 20% believe that a broader range of analyzed and collected data oversteps the ethical line and needs to be controlled by the government.
The expansion of the analyzed data, indeed, distorts the result and leads to worse credit analysis. You will turn down more applications not because a borrower has a poor credit history, but has time to pay the bill only at night. As a result, banks and financial organizations will reject a bigger amount of applications losing money.
Ironic, but the perfect credit scoring approach is to analyze the traditional data regarding the banking history of clients. Let’s check what traditional data make up a credit score for lenders.
Factors Affecting Credit Score
Banks, usually, take into account five main things drawing up a credit score. Applicants with a perfect credit score have high chances to obtain credit and at a good interest rate. If a credit risk manager sees a negative credit score, the application will be rejected. So, let’s discover what helps and hurts your credit score the most.
Payment history
Payment history is the most important part of a credit score — 35% of all. It reveals all the payments a borrower has ever made and debt timely repayment. This does include not only your credit card payments, don’t miss a payment on any account, such as pay for Internet services, mobile phone, utility, and others. Moreover, credit bureaus also consider whether you pay bills on time or not. If you have trouble with paying a bill, it’s better to contact your lender and work out a compromise. Otherwise, lenders won’t be sure in the future that you will pay back other debts.
Sum up: Pay your bills on time.
Credit utilization
There is a myth that the less of your available credit you use, the higher your credit score. As financial organizations devote 30% to this indicator, we can say that it’s not a myth; it’s a guideline.
Credit utilization indicated a limit of credit you use. Experts recommend using only 30% of your credit. Why? Data shows that people with higher levels of utilization have a higher default probability. Moreover, if a borrower maxes out all credits, it demonstrates a lack of self-discipline. So, if it turns out to go beyond the limit, try to set balance notifications or make extra payments within the month.
Sum up: Stay within the 30% limit.
Credit history length
The length of credit history is a controversial parameter. The biggest difference in credit scores is among generations. While 62% of boomers have a high credit score (over 700), only 25% of Gen Z might count on getting a loan. But it doesn’t mean that younger generations are unscrupulous, they just have a shorter credit history.
Credit history includes the age of all your open accounts. So, we recommend keeping even the oldest ones and unnecessary accounts open to have a longer credit history. You can also try to become an authorized user of an old account with a max credit score history.
Sum up: Keep growing up and accounts open.
Credit mix
Credit mix stands for all the types of credits you have. People with credit scores over 750 always have a mix of credit products, including car loans, student loans, mortgages, or payday credits. This proves to lenders that you’re able to manage your money. But it doesn’t mean that you need ten credit cards per each loan. If you apply for too many credit cards in a short period of time (up to 3 months), lenders might think that you’re desperate for credits.
Sum up: Don’t be afraid of multiple credits.
Recent loan applications
The time between your loan applications matters. Let’s imagine that you’re a lender who gets a loan application. Having conducted research, you understand that he or she already has an outstanding loan and applies for another one. The first thought — the person doesn’t have money to repay the first credit. We decide that the borrower might not payback in the future and decline the application.
Besides, each hard inquiry on your credit takes several points off your total credit score.
Sum up: Take a break from loans.
How to Calculate Credit Scores: GiniMachine
Cutting-edge solutions simplify credit decision-making. Instead of monitoring every loan application manually, credit scoring software like GiniMachine can make decisions for a human.
The solution utilizes the most important factor affecting credit scoring — historical data:
- Occupation type of borrowers
- Income
- Credit products
- Monthly payments
- Pension contributions
- Amount of active credits and repaid loans
- Criminal records and more
The software shows the calculated Gini index for the records, the value of analyzed attributes, diagrams reflecting the results of the model, and gives recommendations for the best cut-off value. Finally, a user gets a list of bad and good borrowers in less than 10 seconds. More information on GiniMachine you can find here.
GiniMachine works only with historical data on borrowers’ financial operations and behavior. The usage of this data reduces subjectivity and seeks to minimize credit risks of lenders and banks. You can increase the return on your lending operation by 37% by hinging the credit risk management upon the main credit scoring factor.
Wrapping it up
The more relevant information you analyze, the more accurate credit model you get. It’s valuable to distinguish useful and potentially bad trends for business. Utilizing quality credit risk modelling software, you can be sure that your credit management is in good hands.
Looking for credit scoring software? Contact us to try Ginimachine.
