Revolve a balance on your credit cards? It’s something many of us do, especially as the holiday shopping season kicks into high gear. But consider yourself warned: It could also be viewed as a red flag by lenders, especially if you’re paying down a smaller share of your debt each month.
Credit bureau TransUnion came out with a new product it calls CreditVision, which gives lenders a two-and-a-half year look back window at how much of your available credit you use and whether you revolve a balance from month to month.
The conventional wisdom is that as long as you keep your credit utilization — the ratio of your balance to your credit limit — under 30% and make your payments on time, it’s OK to roll over a balance from month to month. But TransUnion says people who don’t pay their balance in full every month, which it calls “revolvers,” are up to three times more likely to fall behind on a new loan within two years than people with otherwise similar risk profiles who pay off their credit cards entirely every month, which it calls “transactors.” So if you think diligently making minimum payments on time makes you look attractive to lenders, think again.
“Without the data available in CreditVision —historical balances and actual payment amount — it is very difficult, and inaccurate, to determine whether consumers are transactors or revolvers,” says Charlie Wise, vice president in the financial services business unit of TransUnion. “Our research has shown that consumers who are transactors are significantly lower risk on new loans than consumers who are revolvers and have lower subsequent delinquency rates on new loans.”
Although Wise says this doesn’t mean lenders should avoid people who revolve balances, serial balance-carriers should take note. “A consumer’s payment behavior on their credit cards and loan accounts may in fact impact their credit score,” Wise says, once TransUnion starts offering scoring models that incorporate this historical data later in the quarter.
With the introduction of CreditVision, all of the big three credit bureaus now give lenders the ability to take a deep dive into your past charging and payment history.
Equifax came out with a product called Dimensions in August that gives lenders a two-year look back. Among other uses, the company says lenders can pinpoint customers most receptive to balance-transfer pitches and determine how much more debt they can take on before they can’t keep up with their payments anymore.
Experian has offered something similar for a couple of years now as part of its TrendView product. It lets lenders see if people are paying off their cards in full every month, carrying balances or “rate surfing,” transferring balances from one teaser rate to another.
“It can be good or bad, depending on what they’ve been doing,” says Trevor Carone, Experian’s senior vice president of sciences and analytics. If they’ve been paying down their debt, lenders now have proof of that, which is particularly good for people who are wiping out a substantial debt quickly.
On the other hand, if your balances are growing from month to month or if your payments have dropped to just the minimum, “That’s a sign of risk, and lenders will take that into consideration,” Carone says.
It’s a double-edged sword if you’re trying to get a handle on your debt. While it’s great if you’re making strides towards knocking out a big balance, it also means you’re more likely to be targeted for new offers — that is, new chances to rack up debt — from lenders eager to gain market share.
And we don’t need an invitation to rack up more debt. Just over 38% of Americans revolve holiday credit card debt, according to Odysseas Papadimitriou, CEO of industry site CardHub.com, and we’re on track to end this year a collective $41.2 billion deeper in credit card debt this year. For the 13% of Americans surveyed by Consumer Reports last November who were still paying off their holiday shopping bills from 2011, this new visibility into their debt could be bad news.
“Short-term changes, if they’re seasonal — lenders expect that,” Carone says. “If your behavior is persistent for six months or more, it becomes more predictive.”
If you run up a balance around the holidays and then pay it off over the course of a few months, a lender can predict that you’ll continue to behave that way in the future. But if the amount you’re paying on those bills drops as the months go by, or if you pile this year’s Black Friday splurges onto last year’s still-existing debt, lenders might not be as thrilled to see that — even if you never miss a payment.