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Credit Score Knowledge Declining

One of the important ways that financial services firms can “lean in” to economic injustice is to level the playing field when it comes to financial literacy. VantageScore Solutions is again pleased to partner with Consumer Federation of America (CFA), one of the nation’s largest and most influential consumer advocay organizations, to address a continuing issue: the lack of knowledge about credit scoring.

Last year’s survey indicated that knowledge was declining. And unfortunately, the 2020 survey shows there are still important knowledge deficiencies; which if left unchecked, can be harmful for a consumer seeking access to credit.

Obviously this isn’t the news that we wanted to share but it starkly reminds us of the importance of producing and supporting tools that help address these knowledge gaps.

It is more important now than arguably any time in our company’s history. Unemployment remains at a historic high while, at the same time, the employment rate plunged to its worst in the past 50 years. Consumers are signaling distress. One indicator is a monthly survey that is conducted by TransUnion, which is one of the owners of VantageScore. On a monthly basis, TransUnion surveys 3,026 adults in partnership with 3rd party research provider Qualtrics® Research-Services. Respondents are asked a number of questions about their financial health and the results are comparable month to month.

According to TransUnion, in the sixth month of this study, over half (57%) of Americans say that they continue to be impacted financially by COVID-19.

What’s more: financial hardship has disproportionately affected some specific consumer segments. Generational differences remain stark, as younger generations are more impacted (Gen Z: 67%, Millennials: 68%) than older generations (Gen X: 55%, Baby Boomers: 39%). Households with children are more likely to report hardship than those without (68% vs. 44%).

As of the end of July when the survey took place, impacted consumers estimate they have 5.9 weeks until they will be unable to pay their bills. However, those who indicated they would not be able to pay within one week increased to 14%. From 9%.

Income is clearly a factor as well. 80% of households with income less than $50,000 are concerned about paying their bills, while 64% of higher-income households (>$100,000) express similar concerns.

Income inequality, and the wealth and housing gaps are issues we must address if we are to have a society where everyone has the same opportunities. In order to achieve that goal, the financial services industry and consumer advocates must partner and pursue solutions.

Financial literacy has to be part of that package.

Along with CFA, we host the website www.creditscorequiz.org. Approximately 250,000 consumers have taken our quiz, and it is available in Spanish as well.

This quiz and the website provide critical information about how credit scores work and what they do for consumers. We think everyone, whether they are above the age of 18 and credit-eligible or in high school but in need of preparatory financial literacy, should take the quiz. And while we are glad so many people have done this, we’re only scratching the surface. Please share the website with your constituents and if you are on social media, we hope that you can share this information with your followers.

Thank you, and we hope you remain healthy and enjoy the rest of the summer!

Regards,

Barrett Burns

CEO and President, VantageScore Solutions

WATCH:
Consumer Dislocation and Credit Score Impacts

Last month, American Banker hosted the VantageScore webinar “Consumer Dislocation and Credit Score Impacts“, a webinar that spoke to the current economic distress that consumers are experiencing, how this will impact their financial health and credit scores, and how lenders can protect their portfolio. If you missed it, there’s still time to register to watch the webinar on-demand until September 18.

To view the webinar, you can register for FREE here:

www.vantagescore.com/VantageScoreABwebinar

More about the webinar:

With tens of millions of American consumers unemployed, and with a staggering amount of loan payments being deferred, the lending environment is extremely volatile. With these issues top of mind, VantageScore Solutions, the company behind the VantageScore credit scoring model, will host a webinar to discuss findings from an analysis aimed at understanding shifts in credit behaviors, trends in credit score distributions, and how credit attributes are being impacted.

Watch this webinar to understand how the macroeconomy impacts consumers’ ability to pay their loans, and how credit scores react to and reflect changing consumer behaviors. Host Dr. Emre Sahingur, Senior Vice President at VantageScore Solutions for Analytics, Research and Product Management, will discuss the following:

  • How credit scores are shifting and how the underlying credit attributes like balances, utilization rates and other indicators are impacting scores
  • How the relationship between risk and the credit score that represents it, is shifting along with the economy
  • How to effectively monitor changes in consumer behaviors and risk levels to make timely adjustments to credit strategies in a dynamic environment
  • Lessons learned from the Great Recession (2007 – 2009) to inform how risk can shift during an economic downturn

Speaker: Emre Sahingur, PH.D.
Senior Vice President, Predictive Analytics, Research and Product Management
VantageScore Solutions, LLC

DID YOU KNOW:
Credit Line Decreases

What to do if your credit card issuer lowers your credit limits 

By John Ulzheimer

In the wake of the 2008-2009 economic meltdown credit card issuers and banks adjusted their underwriting and risk assessment practices by increasing credit score requirements and also adjusting the credit limits of existing cardholders. This is often referred to as the “flight to quality” and is a common practice that occurs in times of economic stress. And, as was predictable, credit card issuers are again lowering credit limits and, in some cases, closing the cards of inactive or underactive cardholders.

Just because your card issuer lowers your credit limit, it doesn’t mean you’ve done something wrong with the management of your card or cards. It’s not meant to be a punitive response. It is, instead, a common practice by card issuers when there is uncertainty in the economy or workforce, as we are experiencing now because of the Coronavirus pandemic.

What is a credit limit decrease?

A credit limit or credit line decrease (they’re the same thing) occurs when your issuer lowers the uppermost boundary of your card’s spending capacity. So, for example, if you have a credit card that has a $10,000 credit limit it means you can charge products and services up to that amount. That amount of spending power has essentially been pre-approved by the card issuer when they opened your account.

Card issuers can reduce your pre-approved spending limit. They can do this, legally, for a variety of reasons. One of those reasons is to adjust the card’s limit to be more in line with the spending and usage patterns of the cardholder. Another reason is to mitigate the card issuer’s risk if the credit quality of the cardholder has deteriorated since the account was opened.

For consumers who have credit cards that are used sparingly, or not at all, it should not come as a surprise if a card issuer reduces that card’s credit limit. And, it should also not come as a surprise if that card issuer closes the card altogether.

What is the impact of a credit limit decrease?

There is a possibility that a credit limit reduction could lead to lower credit scores. There is a metric in credit scoring systems called the “revolving utilization” ratio. This ratio considers the relationship between your credit card balances and your credit cards’ credit limits.  If your balances are using up too much of your limits your credit scores can suffer.

Calculating your revolving utilization ratio is actually pretty simple. Pull one of your credit reports and grab a calculator. Take the sum of the credit card balances on your credit report and divide it by the sum of the credit card limits on your credit report. That is your revolving utilization ratio and it should, optimally, be as low as possible.

When your credit card issuer closes a card or otherwise reduces your credit limit, you lose the value of that credit limit in the calculation of the revolving utilization ratio. For example, if you have a credit card with a $10,000 limit and a $2,500 balance then your utilization of that card is 25%. If, however, your card issuer lowered the limit to $5,000 then your utilization would jump to 50% and your scores could suffer as a result.   

What to do if your card issuer lowers your credit limit

If your credit card issuer lowers your credit limit, there are a few things you can do to mitigate any potential impact to your credit scores. First, you can certainly contact your card issuer and ask them to reconsider their decision. They may see your reaching out as evidence that you value the higher limit and, thus, reinstate the previous limit. There is no guarantee they will change their mind though.

You can also reduce your credit card balances in order to maintain a lower utilization ratio. By lowering your balance by the same amount as your credit limit was reduced, your utilization ratio stays the same. As such, your scores will not be impacted. Finally, you can certainly open a new credit card. A newly opened credit card will have a credit limit and once that limit is reported to the credit reporting companies any credit scores calculated on your credit reports will take into consideration that new unused credit limit. You should keep in mind, however, that opening a new card will result in a new credit inquiry on one of your credit reports and a new account likely on all three of your credit reports. These types of things can lower credit scores, albeit slightly and for a limited period of time.

Will a lower credit score always be problematic?

To the extent your card issuer lowers your limit and your scores do go down as a result, this doesn’t mean you’re going to feel some sort of adverse impact to your borrowing capabilities. For example, someone whose scores go from the mid 800s to the low 800s isn’t going to miss a beat because their scores still indicate they are an elite level borrower and are almost void of credit risk.

The only real issue with a lower credit score is if the lower score causes you to move into a higher risk tier. For example, if your scores went from the low 700s to the mid 600s, that’s a meaningful score change. The way around this, of course, is to work to earn the highest possible scores so that changes to credit limits are more of a nuisance and have no actual real-world impact to your credit risk.

The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.

STUDY: latest credit score knowledge survey results

Washington, D.C. – The tenth annual credit score survey, released by the Consumer Federation of America (CFA) and VantageScore Solutions, LLC, shows that low-income households are most likely to apply for credit in the next 12 months.  Yet, the survey also reveals that these households generally know much less about credit scores than households with higher incomes.

The phone survey of 1,001 representative Americans showed that 20 percent of households with incomes below $25,000, but only 13 percent of those with incomes of at least $75,000, intended to apply for credit in the next 12 months.  At the same time, as the table below shows, these low-income consumers are far less likely than the high-income consumers to answer consumer knowledge questions correctly.

Knowledge Question

Income At Least $75k

Income Below $25k

Mortgage lenders use credit scores

95%

75%

Credit card issuers use credit scores

92%

76%

Personal bankruptcy influences scores  

92%

72%

High credit card balances influence scores

92%

76%

Keeping low card balances can raise scores

77%

68%

Consumers have more than one credit score

74%

43%

700 is usually a good credit score

83%

69%

CFPB best agency for filing a complaint

86%

66%

 “At least one-quarter of low-income consumers lack the knowledge to help them raise low credit scores,” said Stephen Brobeck, a CFA Senior Fellow.  “This lack of awareness could limit their access to credit or subject them to higher costs.  Low income households can least afford to pay higher interest rates and fees associated with low credit scores,” he added.

 Low-income consumers are more likely than high-income consumers to consider their knowledge of credit scores to be fair or poor – 58 percent vs. 37 percent.  Probably one reason for this perceived lack of knowledge, as well as less actual knowledge, is that low-income consumers are much less likely to have obtained or received any of their credit scores in the past 12 months – 32 percent vs. 59 percent for high-income consumers.

CFA and VantageScore developed and co-sponsor an interactive website, CreditScoreQuiz.org, that consumers can use to test their knowledge of credit scores. The website includes a 12-question quiz, available in both English and Spanish (http://www.cuestionarioparaelpuntajedecredito.org/).

 “Taking our online credit score quiz provides an easy way for consumers to improve their credit score knowledge,” said Barrett Burns, President and CEO of VantageScore Solutions.  Some 250,000 individuals have taken this quiz.

CFA and VantageScore will prioritize low-income households in the dissemination of the quiz this year.  This effort will include working with organizations and networks that serve and have access to millions of low-income consumers.

While survey results indicated that low-income consumers had the least amount of  knowledge about credit scores, a large number of all consumers still lack important basic knowledge: 

  • Only 22 percent know that on a $20,000, 60-month auto loan, a borrower with a low credit score would likely pay more than $5,000 in interest than a borrower with a high score.  Low scores may qualify borrowers for subprime auto loans only, with annual interest rates frequently exceeding 20 percent.
  • Only 33 percent know that a credit score typically measures the risk of not repaying a loan.  14 percent think that it measures knowledge or attitude toward consumer credit.
  • Only 50 percent know that an electric company can use credit scores to determine the amount of deposit.
  • Nearly half (48 percent) think that a person’s age is a factor used to calculate a credit score.  However, only one’s use of credit actually influences their scores.
  • Over two-fifths (42 percent) think that credit repair companies are always or usually helpful in correcting any credit report errors or taking other measures to improve one’s credit score.  Experts agree, however, these companies tend to charge relatively high fees to do what consumers could do on their own for free.

 In brief, consumers can raise their credit scores or maintain high scores by:

  • Consistently making loan payments on time every month.  A late payment may lower one’s credit scores by dozens of points.
  • Using a small portion of the credit available on a credit card.  In general, the higher the percentage of credit line that is drawn down, the lower one’s credit score.
  • Paying down credit card debt rather than just shifting it to another credit card or to a home equity loan.
  • Regularly checking one’s credit reports to make sure they are error-free.  This can now be done for free monthly by going to annualcreditreport.com or by calling 800-322-8228.

The survey was undertaken by SSRS via phone (70% cell, 30% landline) of 1,001 representative Americans from June 16-21, 2020.  The survey’s margin of error is plus or minus 3.5 percentage points.

The Consumer Federation of America is an association of more than 250 non-profit consumer groups that, since 1968, has sought to advance the consumer interest through research, education, and advocacy.

 

5 QUESTIONS with Arizent

Gemma Postlethwaite is Arizent’s CEO, responsible for the company’s 30+ brands. Prior to joining Arizent, Postlethwaite served as CE of PIRA Energy Group, where she led a major transformation of the company and established PIRA as a leading integrated, research and data provider to the global energy markets. In 2016 Postlethwaite led the sale of PIRA Energy Group to S&P Global.

Postlethwaite has spent several years in leadership roles in the business information sector. Prior to PIRA Energy Group, she was SVP, Strategy and Operations at Altegrity, a global provider of risk and compliance solutions; and Chief Product Officer and President of Infogroup’s SMB business unit. She also spent eight years at Thomson Reuters in various leadership positions spanning from product to commercial management and also led the channel partnership business for the Investment and Advisory Division.

Additionally, Postlethwaite is a Board Member at GLG (the Gerson Lehrman Group); and proudly serves on the New York Board of the All Stars Project whose mission is to transform the lives of youth and poor communities using the developmental power of performance, in partnership with caring adults. She is a graduate of the University of Kent.

First, can you tell us what does Arizent do?

Arizent is a business information company, empowering people in financial and professional services to lead by offering unique insights and analysis, convening the foremost industry leaders on important issues of the day and delivering definitive research and benchmarking that helps our clients advance their thinking, their businesses and their personal careers.

Arizent recently transitioned from being formerly called SourceMedia.  What has changed, and what was a lesson learned during this recent transition? 

The transition was a big lift for us, but a crucial one. It has defined a clear sense of purpose for our employees as well as our customers. Everyone wants to believe that they play a role in making the world a better place. Our new mission of advancing professional communities matters because we spend half of our days engaged with work. If that time can be spent helping people reach their goals and breaking down barriers, it’s a pretty compelling proposition. Our goal is simple: To deliver on our mission while growing our own business and the careers of our employees.

We have a belief – both for our employees and for our clients – that everyone has the potential to lead…to rise. With powerful ideas and a strong network behind you, anyone can go from “unsung hero” to “industry change maker.” And our job at Arizent is honestly to uncover those transformative ideas, to rally leaders around them, to set them in motion and then to re-define industry standards by measuring their impact.

This is your second CEO role, what have you learned about taking the reins and what advice would you give to others taking on a new challenge?

One of the most common pieces of advice you always hear when you take on any new role or any new challenge is to make sure you’ve got a 100-day plan checklist. And it is great advice, but a checklist will only help you stay organized. It helps make sure you’re looking at some of the fundamentals, but it’s not on its own a recipe for success. That said, one of the things I always say is get to the data fast. And by that, I mean, I think that we all create stories, narratives about our company’s journeys and the roles that we take within them. It’s very easy when you’re in an organization to quickly fall in love with somebody and their narrative before you get to the facts. So I tell everybody, first get fluent in the company’s metrics even before you set foot in the building!

Obviously, there is a lot to learn in the early weeks and months. But building the connection, trust and support that you need for the entire organization to be on your team, is essential to do right from the outset. Engagement is about communicating early and often. I’ve learnt you’re better off saying: “here’s how we’re going to approach this together” – making sure we understand what are the insights we need to develop a strategy, how will we prioritize and use our resources to execute that plan and how that strategy might inform how we’ll align our organization. If you bring everyone on the journey with you, then you will have a much better chance of building true engagement.

How have you been able to navigate the pandemic? How have your teams been adjusting to the new normal of working together but apart?

I have been so proud of how our organization has adapted. Obviously, initially we had to make sure we had business continuity – adapting to working from home fully and making sure we could deliver for our customers with uninterrupted service.

What became really clear from the beginning was that we were going to have to double down on ways that were going to keep us connected as an organization: connected to our mission, connected to what we needed to achieve and connected to each other.

And to that end, we increased our communication considerably. Whereas, back in the office we would have an all-hands-on deck company meeting every month. Now we have them every single Friday. And these meetings have evolved to not just discussing business updates, where we bring in outside speakers and create a dialogue that’s about our customers, our products and services, but it’s also set in the reality of what we’re solving for both professionally and personally. These meetings also are an opportunity to get to know our colleagues. We’ve also learned to have fun together and take time to focus on our wellness, like on “Wellness Wednesdays” when we do stretching and meditating.

We do pulse surveys frequently amongst our employees to understand how people are feeling, and our engagement levels have soared during this period, which has been wonderful to see.

What will the future of financial media, and particularly Arizent, look like?  

Has the pandemic changed or altered our strategy? The truth is that it hasn’t changed the strategy, but it’s forced us to accelerate our strategy.

We believe that the future role of any media company is to transform its audience of readers into a community. This creates a network of business leaders, rising stars and the products and services who can help them. Our role is to be the platform where they come together to learn from us, from each other and from seasoned experts in their specific field of work. Through this lens, the business model opens up a lot of possibilities for new products and services. It also makes our core offering that much stronger and fosters loyalty among our long-standing members.

“The Most Powerful Women in Banking” is one of VantageScore’s favorite events of the year. What other ways does Arizent help champion women in the industry?

We have recently launch Arizent Leaders, which is a program born out of The Most Powerful Women in Banking. It started as an executive peer network aimed at making progress toward gender parity in the workplace. We have many of the top banking institutions in the world involved as advisors and members. It has since evolved into a thought leadership platform that resembles a Netflix-style channel inside of our flagship brands like American Banker, The Bond Buyer, National Mortgage News and PaymentsSource. Our hope is to inspire both women and men to grab hold of our resources and make tangible outcomes towards diversity, as well as other transformational challenges in their businesses.

 


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