Credit scores are an effective barometer of an individual's credit health, and they are used widely by creditors and lenders to weigh a credit applicant's financial risk, i.e., their likelihood of paying back the debt.
Credit scores have limits, however, as they typically only reflect the "meat and potatoes" of a consumer's financial habits—things like active accounts, debt accumulation status, and debt repayment history. Also, a credit score is just a number and they can't tell a lender why a score is what it is.
Often, creditors want to know more about an applicant, in order to know all they can about a potential borrower before extending credit. They might look at your actual credit report, in addition to your credit score.
Credit scores are based on the information in your credit reports, which records the type of loans and credit you've received, your track record in paying back those debts, the length of time any credit accounts have been active, how much actual credit you've taken in historically, and whether or not you're seeking new loans or credit. Additionally, a credit report includes information about bankruptcies, civil judgments and where you reside. But sometimes lenders want to know even more.
Take Ford Motor for example. Their financing unit made headlines in 2016 when it said it would look at new ways to approve consumer credit applications, primarily to boost Ford vehicle sales.
Some of the new factors Ford Credit added to its credit vetting list included looking at whether applicants provide the same phone number on previous loan applications. The idea here is that applicants who list different numbers might have failed to pay prior phone bills and thus needed a new number. They also looked at non-traditional personal financial factors, like whether or not an applicant has a professional occupational license—a sign that the consumer likely has a solid income and is a good credit risk.
Let's take a look at what surprising things lenders look for when they are deciding whether or not to lend you money above and beyond a standard credit check. Often, these factors apply:
1. Employment history
Aside from your debt amount and your track record of paying your bills, more lenders are adding employment history to the credit checking criteria mix. Creditors may want to review your job history as a means of estimating income stability. A good employment track record—say, two or more years at the same company—indicates you're stable professionally, and thus a good credit risk. But if your employment history is of the job-hopping variety, that could be a cause of concern for lenders, who may either deny you credit outright, or approve your credit application, but at a higher interest rate that helps the lender compensate for the added risk. In case they ask, be prepared to provide a reasonable explanation.
2. Income
Personal income is also a burgeoning factor in loan and credit approvals. Much like employment history, where stability is rewarded with credit approvals and lower interest rates, a steady income indicates to creditors that you have the financial means necessary to cover your debt payments. Any "breaks in the chain" in the form of little or no income, and creditors could view you as a higher credit risk, and place your credit application in jeopardy.
3. Cash flow/liquidity
Lenders increasingly want assurance that you could continue making your loan or credit payments even if you're incapacitated or laid off. That's where cash flow comes into the picture. If you run into a financial emergency, creditors want to know if you have any financial assets, like stocks, bonds, money market accounts, or certificates of deposit, that can be used in the short-term to cover your debt in the event of a financial setback. In short, the more liquid assets you have, the more likely you'll make your debt payments.
4. College degree
A college degree is something of a double-edged sword for credit applicants. While lenders surely recognize the income potential of most college degrees, relative to an applicant with a high-school degree, any burdensome student loan debt could give a creditor pause. In general, college graduates don't earn big annual incomes right out of the gate. If you add high student loan debt to the story too, lenders may hold back on credit approval, or at the least, offer credit approval but at a higher interest rate. Either way, creditors increasingly are looking at collegiate history as a factor in reviewing credit, especially for younger borrowers without a substantial income and financial payment track record.
5. Length of time in current residence
The longer you reside in one home (especially as the owner), the more likely you'll be approved for credit. Why? Because "home stability" shows you've been able to make your mortgage or rental payments, and thus represent a good credit risk.
6. How often you change cell phone numbers
As we noted above, a stable phone number is a big plus for creditors these days. According to a recent Ford Credit/ZestFinance study, "if the (credit applicant) uses the same cell phone number over and over and over, that helps indicate a level of stability. Stability is usually a very positive indicator for someone to continue to pay on any obligation they have."
7. Any professional "occupational" licenses
Creditors increasingly view applicants who own professional occupancy licenses in high regard. Official notification that you're a lawyer, financial planner, doctor, licensed technician or plumber tells creditors that your chances of having a high, stable income are higher than many other credit applicants.
Startups and emerging technologies
It's no coincidence that non-credit scoring techniques are popping up on the personal financial landscape at the same time robotics and "FinTech" digital-based solutions are emerging.
"FinTech has become such a huge player in the lending space," says Jeff White, a financial analyst at Fit Small Business in New York City. "It has algorithms that can pull your data from your credit profile and bank account quickly, easily and accurately. That algorithm will look at literally thousands of data points, and give the lender a score, which shows how risky you may be as a borrower."
At New York City-based FigLoans, chief financial officer John Li says the credit checking trend is to dig deeper than traditional credit scoring models.
"Specifically, we look at things like income and spending trends, debt service ability and other metrics," Li says. "We know other lenders look at things as detailed as the browser the borrower uses to apply and what questions the borrower asks during the application."
"Because these approaches have only become available with recent technological innovation, the jury is still out on the ultimate effectiveness of these approaches," he notes.
Even so, some non-traditional personal financial indicators are gaining more steam with creditors than others.
"I've found there are a few different ways that lenders might assess risk aside from a FICO® Score☉ , and one of the more common ways is employment history," says Daniel Wesley, founder, and owner of CreditLoan.com. "A steady job history means stability, and at the very least an offer letter for a job can be used to indicate a borrower has the means to repay a loan."
Wesley says that one of the more interesting credit application checks comes from the online lending firm Upstart, which requests a college transcript for potential borrowers that are more recently out of college (operating on the premise that, fair or unfair, college graduates are good credit risks.
"As far as improving finance checks, I really like the way Upstart works," says Wesley. "They use artificial intelligence and machine learning to go above and beyond traditional credit checking, which actually results in more approvals."
Meanwhile, traditional credit checks remain the first option of choice for creditors, but the landscape is changing, and more non-traditional credit health vetting models are in play.
Expect that trend to continue, as lenders and creditors strive to balance that fine line between approving more loans and facing the risk not having their loans paid off.
Any way they can get to that sweet spot is the way to go, tradition or not.