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Marketplace Scratch Pad

The secret credit scores

Scott Jagow Jun 24, 2009

I thought you might want to read this. At MSN Money, personal finance columnist (and Marketplace contributor) Liz Pulliam Weston has a really interesting article on some of the other scores that lenders keep on you.

These may not come as a surprise, but it’s useful to know, nonetheless. Weston says banks are using the information to not only to estimate your risk as a borrower, but also to predict how profitable a customer you might be.

Here’s a sample from her list:

Response score: This score predicts the likelihood a consumer will respond to an offer of credit, such as a new card or a balance transfer offer.

Attrition-risk score: Attrition risk refers to the likelihood a user will stop using a card, and attrition-risk scores are typically used in combination with other scores to determine what to do next if you look ready to bolt.

Behavior score: Credit scores provide a snapshot of how a consumer is handling all of his or her credit accounts. Behavior scores, by contrast, typically focus on a single account (the one you have with that particular creditor) but take in a broad view. Does the user pay off her bills every month, carry a balance occasionally or frequently pay only the minimums on her cards?

Transaction score: These are the scores run each time you use your plastic to determine whether the transaction should be approved. Issuers are typically looking for signs the transaction might be fraudulent, but transaction data can be used in other ways as well.

For example:

Let’s say you typically spent $1,000 a month on your credit card, usually on toys, clothes and eating out at family restaurants. Then one month your spending changes — you still spend $1,000, but now it’s to get cash advances, buy groceries and gamble at the local racetrack.

The scoring formula may decide you’ve gone from Stable Family Guy to Desperate Unemployed Guy and flag the issuer that you’ve become a higher-risk customer.

So, the credit card company might decide to reduce Desperate Unemployed Guy’s credit limit or change his interest rate.

Obviously, the new laws that were just passed will prevent some of this information from being used that way. But it’s good to know what tools lenders have been using to make what sometimes seem like arbitrary decisions.

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