Bankruptcy Risk Score is Just the Tip of the Iceberg

Recently, there's been a lot of news coverage about the "bankruptcy risk score," a score used by many lenders in making decisions. The mere existence of a bankruptcy risk score that consumers don't know about and may not be able to see called into question some basic assumptions about managing our credit. These mysterious numbers in the hands of creditors, but unavailable to consumers, largely defeat the purpose of the credit disclosure requirements of the FCRA.

It turns out that the situation is far worse than it initially appeared-and that it isn't a new development. The Federal Citizen Information Center has information about risk scoring on its website that was made available by Experian in 2003. And risk scoring is far more varied and complicated than the bankruptcy risk score we've been hearing so much about. Equifax offers Score PowerR to consumers with the tag line, "Know what lenders know and become a better negotiator." The truth is, though, that consumers purchasing their credit reports and FICO scores may not "know what lenders know."

A Risk Scoring Model for Everyone

Each of the three major credit bureaus offers industry-specific risk scores to businesses. Experian, for instance, offers the TEC Risk Model SM, a risk assessment program designed specifically for telecommunications, energy and cable companies. This model purports to more accurately assess the risk of a consumer as it specifically relates to this kind of service account, and claims to do so by "accurately scoring a larger number of consumers considered unscorable by traditional generic risk models." What information and criterion are used to make those determinations isn't clear.

Other specific risk scores venture even further into traditional lending areas. The Fair, Isaac Corporation-the people who give us FICO scores-have a variety of alternative products available to companies that extend credit. In addition to the Credit Bureau Bankruptcy Score, the Credit Bureau Risk Score, and the FICO Expansion Score (which generates credit scores for consumers who lack sufficient credit history to be scored traditionally), the company now offers the Next Generation Risk Score. The Next Generation Risk score-a score offered by all three major credit reporting agencies under different names-"identifies and projects the full range of credit risks-including bankruptcies, charge offs, repossessions, loan defaults and delinquencies."

TransUnion offers the automotive industry "specialized options that predict the likelihood of delinquency or even the potential for bankruptcy on an auto loan."

You Don't Know What Information Your Creditors are Considering

The bottom line is that what your prospective creditors are looking at when they make decisions might well not be the same thing you looked at when you ordered your free credit report. You can ask a potential creditor what risk model or scoring system they use, but the answer won't necessarily benefit you, since much of the information that goes into determining these auxiliary scores isn't available to consumers.

We can assume that many of the traditional factors like timely payment and not using too high a percentage of your available credit will impact these various scores, so it's important to stay focused on those factors that we already know help build credit. Still, it's just as important to be aware that, when you order and review your free credit reports, you really haven't seen the whole picture.



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