If you’ve been diligently working to rebuild or establish credit, receiving a pre-approved credit or balance transfer offer signifies a rite of passage into the card carrying world of…well, card carrying. If you hate junk mail and preapproved credit offers because you know you’re prone to overspending with too much available credit, you know credit offers lying about make you more subject to credit card fraud, or you just despise unnecessary waste, you probably rip or shred the offer at first sight, and throw it out of sight, and mind. (FYI, you can opt out of preapproved offers altogether at OptOutPrescreen). But, you may occasionally wonder, how and why do those preapproved credit offers make it to your mailbox in the first place? Adrian Nazari, CEO of CreditSesame kindly sheds some light on the often mysterious issue of preapproved credit offers.
Think you’ve got just one relevant credit score? Not so much, says Nazari. In fact, you have five different scores that potential lenders and your current creditors use to predict how well you’re doing financially– and how much risk lending you money presents to them.
Indicator #1: Behavior Score. Nazari says this score generally monitors your behavior on an ongoing basis. If there are significant changes in your shopping or spending habits, this score helps a creditor determine if they should reissue you an expired credit card or increase/decrease your credit limit or interest rate. (Yes, they have the legal right to do that, with advance notice. If you don’t like their terms, you can walk–but you still have to pay your balance). Nazari provides this example: Suppose you typically shop at high-end stores and regularly pay your card balance. Out of the clear blue sky, you start shopping at discount stores and carrying a balance on your cards. Though the change may not mean that you’re short on cash..it probably does…and it tells creditors that you’ve become higher risk. Alternatively, if your behavior data indicates you are a good risk but you aren’t profitable (meaning, you pay your balances in full each month, and even worse for the lender, get cash back points for doing so), they’ll try to tempt you into spending more, and hopefully (for them), carrying some kind of balance.
Indicator #2. Revenue Score. According to Nazari, FICO says revenue scores allows creditors to scout out the slightly higher risk prospects who could be highly profitable. (In short, they pay their bills–but carry a balance).
Indicator #3: Bankruptcy Score. This score, explains Nazari, is an algorithm that lets creditors know how likely it is that you’ll file bankruptcy. When you show signs of cash flow issues, like missing bill due dates, carrying high balances, requesting higher lines of credit or opening several credit accounts (or simply just applying for several loans), it tells lenders you’re in financial hot water–and they may want to hedge their risk.
Indicator #4: Collection Score. Determines how likely it is you will pay a debt you’ve defaulted on. The lower the score, the less likely a debt collection agency is to pursue you. Frankly, it’s not worth their time if they’ll never be paid for their efforts.
Indicator #5: Attrition Score. Ever wondered why banks push things like direct deposit, online bill pay and automatic transfers to other accounts so heavily? I can tell you; I used to make a living promoting them when I worked in financial services marketing: Using them makes it harder for you to change your banking relationship; no matter how much you hate your bank, it takes a lot of time, and risk, to switch your direct deposit and bill payments to a new provider, especially if it means your paycheck is delayed, or a payment arrives late because of the transition. Most people just suffer and stick with their bank once these “sticky” services are in place. Similarly a high attrition score tells a lender you’re likely to start a relationship with another financial institution, usually triggered by you using the card less. Expect to see more offers to keep your business, like lower rates, extra points and maybe an extended credit line
