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Changing view of nonprime scores

By Sheyna Steiner · Bankrate.com
Friday, January 18, 2013
Posted: 2 pm ET

Subprime lenders may finally shed their predatory image thanks to better data collection and new products and services. The industry says they’re finding ways to give consumers what they need -- often at better prices than traditional banks.

Many of these lenders gathered this week at the Clarity Services Round Table in Clearwater Beach, Fla., where subprime (also known as nonprime) lending was a major topic of conversation.

Tim Ranney, president of Clarity Services, a consumer reporting agency, says subprime consumers have been misunderstood by many lenders. For instance, if they have credit cards and still take out payday loans, lenders may conclude they're not intelligent enough to know that a credit card will be better than the payday loan.

But that's not the case, Ranney says.

"The consumer is protecting the card," he says. Major lenders "sometimes do not understand that."

Subprime consumers are generally defined as people with FICO scores at 660 or below, according to the FDIC.

That FICO score, however, masks a variety of differences between subprime consumers. People who've had, until just recently, excellent credit are lumped with the highest-risk consumers. So are people who've had their credit dented through no fault of their own.

Lenders say they're now analyzing consumer data and conducting surveys to get past those low FICO scores and find subprime consumers who are worth another shot.

Clarity Services, which uses demographic data and conducts surveys on subprime consumers, groups them into four categories.

  1. Newbies, such as people graduating from high school or college and immigrants with no credit history.
  2. Consumers who only recently fell into the subprime category.
  3. People with low incomes, little credit history and who are financially unstable.
  4. Scammers who apply for credit with no intention of paying it back.

People with generally unstable financial lives and fraudsters get lumped into the high-risk category. The others are considered to be good borrowers.

Finding the right fit

Clarity Services focuses on consumers that fall beneath the prime market. They track payment and behavior data that the three big credit bureaus -- Equifax, Experian and Transunion -- don't. The company was founded in 2008 so it's a relatively recent development. There are other services that also focus on markets that some traditional lenders eschew.

BillFloat, for example, helps consumers make ends meet between paychecks. Its vice president of risk and analytics, Bruce Brenkus, said his company offers short-term loans specifically for bill payment for consumers who need more time to pay. The loans are charged a 36 percent annualized interest rate but the loan is paid in 30 days.

"What we do is known as small-dollar lending. It's 3 percent interest on (a) 30-day loan," Brenkus says.

BillFloat customers give the company their bank account information when they apply for a loan. BillFloat will send the payment for the bill directly to the creditor, then, 30 days later, the loan to BillFloat will be due.

Many people who struggle with bills, struggle because the payment date falls at a bad time, Brenkus says.

The due date may be negotiable, however, so consumers should check with their lender to see if they can move it to a more convenient time.

Follow me on Twitter: @SheynaSteiner.

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March 09, 2013 at 11:02 pm

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