How you pay your bills might affect your credit

Lenders are no longer just interested in whether you pay your bills or not. Increasingly, they are looking at how you pay those bills to determine whether they want you as a customer.

Credit reports now show if you regularly pay your credit cards in full every month — making you a low-risk "transactor" — or if you are a higher-risk "revolver" who carries a balance.

Some lenders use the information to determine what types of credit cards and loans to market to people, while others are starting to use the distinctions in decisions about whether to grant credit at all, as well as what rates and terms to offer.

Separating transactors from revolvers has become "the hot credit report attribute du jour" for lenders and researchers, said John Ulzheimer, who has worked for credit scoring company FICO and credit bureau Equifax.

Lenders are constantly looking for better ways to assess risk, and payment trend data seems to offer insights that traditional credit scoring models do not, said Alex Johnson, senior analyst for Mercator Advisory Group, a payment and banking industry consultant.

"This data tells a much richer story, because you can see the trends over time," Johnson said.

That is in contrast to the credit scores, which do not distinguish between people who carry balances on credit cards and those who pay them off.

Revolvers are three times more likely to default on new credit cards and auto loans than transactors, and five times more likely to default on current cards, a TransUnion study found.

Credit bureau Experian has incorporated payment trend data in its Trended Solutions products to help lenders spot risk and more precisely target borrowers with credit card offers. Equifax has a similar product called Dimensions.

TransUnion, meanwhile, recently introduced a second version of its product, called CreditVision Link, that also factors in alternative noncredit data such as checking accounts, address changes and magazine subscriptions to identify people who may be good credit risks but who are overlooked by traditional formulas.

The formula identified 23 million people as "prime" or "near prime" — that is, good risks — who were categorized as "nonprime" or not good risks under traditional credit scores, said Mike Mondelli, a TransUnion senior vice president.

A lender may have a credit score cutoff of 660, for example, which would mean someone with a traditional score of 659 would be turned down. But the CreditVision score may add a few points for regularly paying off or paying down credit card balances.

Using payment patterns this way is not the norm yet. But Mondelli predicted most if not all lenders would soon be adopting it as a best practice.