Most consumers today are savvy enough to check their credit scores before they even walk into the dealership. Knowing their score lets them have a better idea of whether they’ll be approved for auto loans as well as the rate that they are likely to qualify for.
The only thing that is a downside (for the consumer) with those credit scores is that their dealerships will most likely be using a different credit score to approve/disapprove auto loans. And it’s highly likely that the consumers will not have access to that credit score.
Many consumers fail to realize that there are other types of credit scores, particularly because it is never truly disclosed to them. The Consumer Financial Protection Bureau (CFPB) ordered Equifax and TransUnion to pay $17.6 million to customers as restitution for deceiving them about their credit scores. The reason they were marked as deceiving was because they were marketed as the scores used by lenders when they weren’t. They also had to pay $5.5 million for fines paid to the CFPB.
The credit scores that consumers gain through credit score providers, like CreditKarma or CreditSesame, are generic educational credit scores. These are only meant to give consumers a general idea of where their credit score lies.
The scores given are based on five main factors, including
- Payment history (35%),
- Amount of debt (30%),
- Length of credit history (15%),
- The mix of credit (10%), and
- Recent inquiries (10%).
Unfortunately, there aren’t any credit scoring models that breakdown auto lending factors. However, it is known that these credit scores do place more importance and weight on certain factors that can influence your scores.
Some examples of what these include,
- Previous collections from an auto loan or repossessions,
- Previous late payments on auto loans,
- Signs of having gone through credit repair,
- Short credit history,
- Signs that they might file for bankruptcy, and
- Recent bankruptcy (especially including car lease or loan)
Almost all of the major credit reporting organizations that cater to automotive dealerships. They all will offer you roughly the same credit score (or at least, they should). So, it doesn’t really matter which one you should. Whichever organization or service suits your budget the best, is the one that you should choose.
The best choice will probably be myFICO, as they are the ultimate provider for credit scores in the automotive industry. For businesses, they offer FICO scores and credit scores for $29.95/month or $329/year. These are the scores that many dealerships use to check the scores of their prospective customers. This gives dealerships more thorough and auto-specific information so that they can be certain of your credit history.
There are four versions of the FICO Auto Score, meaning that you have the option to use any of those. The most recent version is the FICO Auto Score 8, which is commonly used across the various credit bureaus. Some dealerships might choose to use the older versions, including FICO Auto Score 4, FICO Autoscore 5, or FICO Auto Score 2.
Other examples include Equifax, TransUnion, Experian PLC, and Credit Karma. There are others currently in the market that also offer similar services. TransUnion, in specific, uses CreditVision, which is specially tailored for auto lenders. This score can range anywhere from 300 to 850. It’s also great for predicting the likelihood of sixty-day delinquency within the first twenty-four months of a new loan.
Alternative Credit Data
Traditional credit data has been the end all be all for the financial services space for quite some time, almost like the quintessential go to. It might just be a habit, or it can also just be that it’s dependable. But as with any other industry, the finance industry has gone through an evolution of sorts. In specific, the way consumers are now managing their money is evolving, thus pushing for deeper insights that are still disputable and defensible.
In better (shorter) words, alternative credit data has become the new black. Alternative data is best described as credit data that is FCRA-compliant, which isn’t typically included in the traditional credit data types. Alternative credit data is the opened-minded approach to standard credit principals.
Traditional credit data types can include tradelines, such as credit card, auto loan, mortgages, as well as credit inquiry and internal records, such as bankruptcy. Alternative Credit Data is like alternative financial service data, consumer permission data, full file public records, utility payments, asset ownership, and rental payments.
Recent studies have shown that over seventy percent of consumers are willing to provide further information if it can increase their approval changes or simply improve a prospective interest rate.
User permission, FCRA compliant data allows lenders to easily verify income and assets electronically without needing consumer permission. This simply allows lenders with more confidence in their decision making, while also allowing customers to have lower costing financing options given to them.
Alternative Credit Data is not a new concept. In fact, it was starting to be seen after the Great Recession, but it didn’t truly gain momentum until the last two years. It involves looking through data that isn’t otherwise gathered through standard, traditional credit scores. This includes things like payday loans, rent, utility bills, and cell phones bills.
It’s great for improving assessments to garner the creditworthiness of an individual. If an individual has a credit score of less than 620, then lenders might not even consider giving a loan to them. However, if they look at other sources of data, then they might reconsider their decision.
On the other hand, it is possible that alternative data has inaccuracies that will prove to be difficult to correct once made. If the alternative data points include factors such as gender, ethnicity, or race, then it might increase the risk of discrimination.
Analytics has the ability to have substantial weight within an individual’s credit score. It can also identity separations across the credit score spectrum. The amount of vehicles sales this could lead to is still an open question, that will eventually be answered as more data is collected.
References: CFPB, The Balance, Experian