When you sign up for a credit card, you’re making the credit-card company a life partner. It knows where you shop, when, what you buy, whether you pay your debts on time and if you’re a sucker for a balance-transfer offer that leads to high interest rates.
It knows a lot more than the credit score any consumer can get, free, each year from Equifax, Experian and TransUnion. (Visit http://www.annualcreditreport.com or call 1-877-322-8228.) Credit-card companies, and the banks that own them, compile dozens of secret scores unavailable to consumers.
Adrian Nazari, CEO of CreditSesame.com, says there are 49 known “custom” credit scores.
“These are more proprietary, internal-risk models,” he says. “I have worked with some of the major banks as an adviser and we can’t disclose some of the exact risk models they have because it is proprietary. But it is safe to say that if two people have the same [credit] score and the same income and live in the same neighborhood and have the same characteristics they may not get the same treatment from two different banks because they don’t exactly match.”
That’s the power of the secret scores. Here are some of them, with Nazari as a tour guide, and what you can do to minimize damage or even turn them into an asset.
Where do all those credit-card mailings originate? You’re scored, secretly, even before the first offer arrives. A credit-card company could use a combination of secret scores outlined below — behavior, revenue and bankruptcy, among others — and then use a response model to determine if you’d actually respond to an offer. Then it targets you.
“Chase is known to be strong on the East Coast,” says Nazari, “but through the acquisition of a number of assets, including Washington Mutual, they’ve found an entry to the West Coast area. They’re offering very aggressive incentives [like $300 to open a checking account] to buy the market. It may not make sense for them, but they’re trying to buy the market.”
Advice: You’ll know what the credit-card company really thinks of you by the offers it sends out. Sit back and wait for the best one.
Every purchase counts. This is how a credit-card company determines if you’re a risk. Let’s say you’re a Nordstrom regular who pays off your monthly balance, then suddenly shift to an Ocean State Job Lot customer who carries a monthly balance. The credit-card company could flag you as a higher-risk customer.
“It looks for consumer spending patterns,” says Nazari, “sometimes even where people are shopping. The idea is to gather that intelligence and then use that, for example, to see if the consumer is a higher risk whether they may be a candidate for certain types of products. Sometimes it can work for consumers and sometimes it can work against consumers.”
Advice: Avoid late payments (the credit-card companies also look at how much you’ve paid in fees), exceeding your credit limit and increasing your credit limit.
This is the sucker search: Credit-card companies look for higher-risk candidates likely to spend freely, carry a balance each month and pay higher rates.
“If they realize you carry a balance from month to month,” says Nazari, “you may be more likely to get a zero-percent-interest balance-transfer offer so once that introductory period is over, you’re 80 percent more likely to pay 17.99 percent interest on the rest of that loan. So you become highly profitable.”
Advice: Don’t become highly profitable for the credit-card companies. The consumer has little control over this hidden score other than retaining a good-to-excellent credit rating.
This algorithm assesses the likelihood you’ll file for bankruptcy, typically generated when a customer opens a line of credit and the card issuer checks the applicant’s credit report.
“On the one hand,” says Nazari, “banks are looking for consumers that are making them more profit and on the other hand they are looking for consumers that are becoming more and more risky.
Advice: Monitor your credit report and resolve any issues. Pay all bills on time and maintain low debt balances. Avoid opening accounts indiscriminately because it invites too many inquiries on your credit report.
Here’s where it might pay to have a bad credit history. This secret score tries to determine if you’d pay a credit-card company after defaulting on a debt. A low score here could dissuade a debt-collection agency from spending much time pursuing you.
“If you default and the bank feels you may not pay them,” says Nazari, “they will be willing to work with you and give you a better deal. If you’re not a career criminal, you may not get a better deal.”
Advice: Avoid collections. Or realize when you can get away with ignoring a collection agency.
Are you tempted by offers from competing credit-card companies? If your score is high, the credit-card company will let you know with some tempting offers to continue using its services.
“A zero-percent [interest] credit card could be a strategy here,” says Nazari. “Or if you have a credit card with them that you’re not using, that’s when you’ll get those checks in the mail that tells you to transfer your balances. Or they’re willing to waive that $50 [annual] fee to help you keep your card.”
Advice: Let them know you’re tempted by other cards. Call and ask for lower rates or request a zero-percent balance transfer. Or stop using the card and wait for the offers to come in.
Written by Kevin Hunt – The Bottom Line, March 16, 2013 published at Courant.com