Perhaps one of the most difficult functions of being a lender is breaking the news to a member that his or her credit report appears to have problems on it. At best, these can be awkward conversations. At worst, they can be deal breakers. It really depends on how you present the information to your member.
According to statistical information compiled by Fair Isaac, U.S. borrowers' FICO scores are evenly distributed. This means 20% of the population have a score below 620; 20% between 620 and 690; 20% between 690 and 745; 20% between 745 and 780, and the remaining 20% above 780. While this may be an interesting fact, the "sweet spot" on a FICO score is 720 and above, where qualified members can usually obtain the lowest interest rate. The point is that many members with scores below 720 may have a reasonably good, if not excellent, credit history. However, if they find they are not offered the lowest possible interest rate, they may think there is a problem with the credit report, or with you, the lender.
Here are some tips on handling difficult credit reporting conversations with your members:
Take time to explain. At our company, for instance, we have often found that one of the biggest sources of confusion and frustration with borrowers is that they simply don't understand the basics about their credit report and credit scoring. Since those of us in the mortgage industry are exposed to this information every day, we sometimes assume that members have some knowledge of these processes. Regardless of what you think is the member's level of knowledge, it's always best to thoroughly explain the process. He or she will not be insulted by your attention to detail. In fact, they will appreciate your efforts to help them.
Before sharing the credit problem, explain to him or her, in simple terms (eighth grade level), how the credit process works. Lenders should first explain the five main kinds of credit information that can affect the member's credit. They are payment history, amount owed, length of credit history, new credit and types of credit in use. Positive items include no late payments reported on credit accounts, long credit histories and few recently opened accounts. Conversely, items that can have a negative effect on a member's credit include late payments, bankruptcy, foreclosure, garnishments, legal items and tax liens.
Credit unions should then tell members that their credit information is independently collected by three credit repositories: Equifax, Experian and TransUnion. Clarify how the information from these repositories is compiled to form an overall "score." To simplify the education process, we recommend not using the scoring company acronyms such as FICOr, Empiricar or Experian/Fair, Isaac Risk Model, as they would only lead to confusion early on in the discussion. However, it is then important to tell the member that these scores provide the best guide to future risk based solely on credit report data. The higher the score, the lower the risk. But be sure to tell them that no score says whether a specific individual will be a "good" or "bad" member.
Next, assure the member that there is no single "cut-off score" and there are many additional factors that you, the credit union, use to determine the actual interest rate.
What's The Problem?
Tell them the problem. Now it's time to break the news. It is best to be concise and straightforward. "Mr. Jones, your credit report indicated that you have a very high balance on your revolving credit accounts. This will probably have an adverse effect on your overall credit score, which will ultimately affect your loan and interest amounts. Were you aware of this?"
Once bad news is received, members sometimes take a defensive posture and may even feel that the credit union no longer wants to work with them. Reassure them that, despite the news, you are on their side, you care about them and that you can still help them.
Give the member some time to absorb the news. If it's really bad news that you're sharing, then have some solutions in mind before you make the call. For example: "Mr. Jones, reducing the balances on your credit cards would improve your overall score and might help you improve the interest rate I can secure for you."
Let the member know that their credit score is only a portion of what lenders review. Tell them that information such as the amount of debt they can reasonably handle given their income, and their employment history is considered as well, and that it is possible to extend credit to them even if their score is low.
Bad credit is not forever. Try to comfort the member by explaining that a less-than-stellar credit report or a low score isn't the end of the world. Credit reports and scores are simply a summary of their risk at a particular point in time. Let them know that the reports change as new information is added to their credit bureau files, and scores can change gradually as they change the way they handle credit, and regardless of their current situation, you want to help them.
Dealing with Conflict. Let's face it, some people aren't willing to admit they have credit problems and that taking a positive approach to conflict is in their best interest. To them, conflict means fighting. Period. You're not going to change them. You can, however, blunt their attacks. Consider these tactics from "Coping with Difficult People" (Dell Publishing) by Robert Bramson, a clinical psychiatrist and human resources consultant:
Sherman Tanks: try to intimidate you with in-your-face arguments. They state opinions as facts. Get their attention by using their first name to begin a sentence, maintain eye contact; give them time to wind down; stand up to them without fighting; don't worry about being polite, and suggest you sit down to continue talking.
Chronic Complainers: find fault with everyone-except themselves. You should politely interrupt and get control of the situation and quickly sum up the facts.
Exploders: throw tantrums that can escalate quickly. You should give them time to regain self-control. If they don't, shout a neutral phrase such as "Stop?" and ask for a time-out.
Being the bearer of bad news to members is never easy. A mixture of empathy, guidance and encouragement is always the best play in disseminating this information.
Richard Downing Jr. is president of The Credit Network, a Framingham, Mass.-based mortgage credit reporting company. For info: www.tcnlink.com or (800) 877-5266.