It should be common sense that people who pay off their credit card balances each month are better credit risks that those who carry a balance, but that has not been reflected in traditional credit scoring. Current formulas for calculating FICO scores do not distinguish between those who pay off their credit card balances each month and those who make timely payments but continue to carry a balance. That may be changing soon due to the introduction of “trended credit data” which separates “transactors”, those who pay off their credit card balances each month, from “revolvers”, those who carry a balance on their credit cards.
The three major credit reporting companies, Equifax, Experian, and TransUnion began using trended credit data a few years ago and have found that differences in payment patterns can predict the likelihood of default. A study by TransUnion discovered that revolvers defaulted three times more often than transactors on new credit cards and auto loans and five times more often on current credit cards. The credit reporting companies are making this trended credit data available to lenders who are using it to determine credit worthiness, not only with regard to the extension of credit but to the types of credit offered and rates of interest charged.
Transactors are considered low-risk and when this is combined with other alternative non-credit data (checking accounts, address changes, and magazine subscriptions) it can boost a person who is considered to have a “non-prime” credit status using traditional credit scoring to “near prime” or “prime”. Such an increase in a person’s credit rating has a huge, positive impact on the availability and cost of credit.
The major credit reporting companies now offer credit evaluation products that include not only trend credit data but alternative non-credit data, as well. Experts in the field say it is only a matter of time before FICO scores reflect these additional factors. At last, in addition to keeping your finances in order, paying off your credit card balance in full each month will garner the additional credit worthiness you deserve.
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages