New Credit-Scoring Model Trended credit data

When you apply for a mortgage, the decision hinges partly on whether you pay your credit card bills on time. Now some lenders are looking beyond on-time payments. They’re also asking whether you pay off your credit cards every month, or if you carry balances from month to month.
What lenders want to see:
• Mortgage lenders prefer it when you pay off your credit cards every month, so that you carry a zero balance into the next month.
• Lenders are a little less enthusiastic if you carry balances every month but they’re shrinking because you’re making more than the minimum payment.
• They would rather not see you make the minimum payment every month on your credit cards, especially if the balances are growing.
Are you a ‘transactor’ or a ‘revolver’?
Lenders have a term for consumers who pay off their credit card balances every month: “transactors.” Consumers who carry balances month-to-month are called “revolvers.” And when credit bureaus gather information on how you manage your credit card balances, the info is called “trended credit data.”
Until recently, mortgage lenders didn’t use trended credit data, meaning they didn’t draw a distinction between transactors and revolvers. But starting this month, Fannie Mae’s automated underwriting software considers trended credit data, looking at each loan applicant’s credit card payments for the previous 24 months. It’s important because more than 1,800 lenders use underwriting software from Fannie Mae, a government-sponsored enterprise that writes some of the rules for the nation’s mortgage lending.
Freddie Mac, Fannie Mae’s competitor, has no plans to adopt trended credit data, according to a spokeswoman.
Will revolvers be turned down?
“One important thing to remember is this is just one of the factors we’re looking at in the risk assessment, and it’s not going to make or break anyone,” says Mindy Armstrong, senior product manager for Fannie Mae.
When deciding whether to approve a loan and how much to charge in fees, Fannie Mae’s underwriting software considers many factors, including:
• Credit score.
• Overall credit report, including payment history, credit utilization and outstanding balances.
• Size of the down payment.
• Whether the loan is for a purchase or a refinance.
• Type of dwelling (house, duplex, condominium).
• Loan-to-value ratio.
• Debt-to-income ratios.
Now you can add trended credit data to that list.
Trended credit data doesn’t change the credit scores used by the mortgage industry. It’s one more piece of information that lenders use.
Credit usage over time
Trended credit data gives lenders deeper insight into credit utilization, says Anthony Harrison, spokesman for credit scoring firm FICO. Credit utilization refers to how close your balance is to your credit limit, and lower is better. For example, if you have a credit card with a $10,000 limit, it’s better to owe $1,000 than $8,000. This is reflected in your credit score.
“Trended credit data gives a picture of the consumer’s credit card balances and limits over time, whereas the single snapshot data that is fed into more credit scores — including the FICO score — only includes information on the consumer’s most recent month’s balance and credit limit,” Harrison says. With trended data, “a lender can get insight into how a consumer’s credit usage is trending over time — up, down, stable, etc.”
Will it help more than hurt?
The way the industry tells the story, trended credit data will be used primarily to give borrowers better rates and fees and not to reject them. The data will affect applications on the borderline, where “making more than the minimum payment each month could help move them to the ‘approve’ recommendation,” Armstrong says.
The credit bureau TransUnion says its research shows that the percentage of consumers in the highest credit tier — people eligible for the lowest mortgage interest rates — would increase from 12% to 21% by using trended credit data.
Consumer advocates mostly say they don’t have an opinion yet about trended credit data. One advocate says he takes Fannie Mae and the credit bureaus at face value when they say that trended credit data will be used to support approval of credit, not denial.
Fannie Mae says the overall percentage of loan applications that receive approval is expected to remain about the same.
It began as a sales tool
The credit bureaus started collecting and offering trended credit data as a marketing tool to help credit card issuers make targeted offers to consumers. As the credit bureau Equifax explained in a sales pitch to credit card companies: “Insight-driven marketing strategies built on actionable, trended data can impact your ability to positively connect with a customer when they have the greatest propensity to spend or respond to an offer.”
With trended credit data newly available, Fannie Mae ran an experiment in 2015. It took a set of existing mortgages and looked back, using 3.7 million credit reports with trended credit data, to see whether the information would have helped Fannie make better loan decisions. The company concluded that trended credit data was worth using.
Fannie’s software uses trended credit data for conventional loans only, meaning it doesn’t use the information when making approval recommendations for Federal Housing Administration-insured or Veterans Affairs-backed mortgages.

Score: www.bankrate.com