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Revenge of the ‘transactors’ – Lenders now consider your payment habits

Fred Williams

People who pay their full balance are so different from other borrowers that there’s a name for them: “transactors.” They’re called that because they use cards to make purchases, or transactions. “Revolvers” use the revolving line of credit to spend more than their income alone would allow.

Transactors already enjoy an advantage over revolvers. They’re better off because they don’t pay any interest on their credit card bills. Now they have another advantage: Transactors look more creditworthy to lenders — including home mortgage lenders, where a lower interest rate means big savings.

In 2013, credit bureaus began reporting data on who’s a transactor and who’s a revolver by including the amounts you pay over the minimum due. The look-back at payment history extends two years or more. Before payment data was included, the report showed a snapshot of how much you owed on a given date, and whether you had paid the account late.

Now this “trended data” on your credit record has received a big public endorsement. In an announcement Oct. 19, the mortgage giant Fannie Mae said it will require mortgage originators to use the data to evaluate loans they underwrite starting in mid-2016. If, that is, the originators want to sell their loans to Fannie Mae.

The data “allows a smarter, more thorough analysis of the borrower’s credit history,” Fannie Mae said in its announcement. “Currently, credit reports used in mortgage lending only indicate the outstanding balance and if a borrower has been on time or delinquent on existing credit accounts such as credit cards, mortgages or student loans.”

Steve Chaouki, executive vice president at credit bureau TransUnion, said credit reports display the over-the-minimum payments on auto loans and mortgages, as well as credit cards.

“Many lenders have been using it in a variety of ways,” Chaouki said. Lenders may look at the payment history to evaluate new applicants for credit, as well as to review the status of existing borrowers.

The more that people pay over the minimum due on an account, the lower their risk of default, TransUnion found. The credit bureau’s analysis found that using the trended data could move millions of people into a higher credit tier. The fraction of consumers in the “super prime” risk tier rose to 21 percent of the population, from 12 percent, when the added payment data was considered, Chaouki said. The credit bureau used the VantageScore definition of super prime, which equates to scores of 781 to 850.

Clearly, someone who is charging $2,500 a month and paying off every cent is in a different financial boat than someone who spent the $2,500 some time ago and now lugs the balance around from month to month, paying about $340 a year for the privilege (assuming the average 13.5 percent interest rate.)

Of course, if transactors look like better risks, revolvers look like worse risks in comparison, as the new data brings their financial picture into sharper focus. However, Chaouki said he thinks lenders are using the new insight to expand their business, not to cut off consumers who already have accounts.

That’s why the endorsement by Fannie Mae is important. When you pull your own credit report, you get to see all the data available, in order to review it for errors. Businesses are more selective. They pull the data that is relevant to them, electronically, and feed that into their underwriting formulas. Just having data available on the report doesn’t mean it will be taken into consideration.

As credit reports evolve and more alternative credit data is available, the big question is how widely the new information will be adopted by lenders as a yardstick for measuring risk. FICO, the author of the best-known risk measure, is still evaluating the trended data for inclusion in a future version of its credit score.

TransUnion said that the trended data, combined with information from alternative data sources, allows lenders to score 95 percent of U.S. adults, including millions of consumers who didn’t previously have enough information on their credit report to generate a credit score. Some 40 lenders are using the credit bureau’s new risk measurement tools.

“I think in general, lenders are looking to make more loans and include more people,” Chaouki said.

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