Re: "Viewpoint: The Potential Dangers of Too Many Credit Inquiries" [Oct. 21]
A recent piece by Tracy Becker explains how the "hard" credit bureau inquiries made by banks in underwriting loans can reduce a consumer's credit score — even though no loan results. These inquiries, technically referred to as "nonpromotional inquiries," become part of the applicant's credit report and then enter the scoring process. Becker urges that banks "exert caution … when making inquiries."
I wholeheartedly agree that doing so will benefit banks as well as customers. But most of the inquiries are made through automated underwriting systems. To eliminate the inquiries, banks need to change the flow of data to these systems. They can do this without modifying their algorithms for making credit decisions. The result is to encourage many more customers to accept loans, which reduces marketing and origination costs. This is already happening at a small number of banks.
While few of them may know the details laid out by Becker, a great many consumers are already fearful that just applying for a card or loan may hurt their credit. This makes them less likely to apply.
It conceivably could be helpful to these borrowers to be informed in greater detail, as Becker proposes, how applying to several different institutions for an auto loan or credit card can adversely impact credit scores — perhaps causing the applicant to be declined or to get worse terms when he seeks credit for as long as two years into the future.
But the better approach is for us to avoid making the inquiries in the first place. We can then tell our customers in good faith that they should be very careful in making any applications elsewhere, in order to avoid unnecessarily giving consent for inquiries to be made.
Most inquiries relate to applications for or management of credit card accounts. A great many other inquiries stem from auto loans.
But, almost all such credit card decisions and many auto loan decisions are initially made using credit models that operate mechanically on summarized credit file data ("attributes"), without the need for the bank to receive and read the full credit report. In particular, these models don't need to consider the identity of the credit grantors whose trade lines are included in the report.
If you don't need to know from exactly whom your customer has been borrowing on specific trade lines, then, pursuant to the Fair Credit Reporting Act, you don't need to make a "hard" inquiry to get the data required by your model. There is a better way.
At least two major banks are using a credit data acquisition process that avoids the inquiries, particularly for credit cards. They use exactly the same credit models as before, they reach exactly the same decisions as before, but now they don't have to make the inquiries — and they save money.
Most banks, however, are still making decisions the old way, simply because — credit being a particularly secretive activity — they are not aware that they don't need to do so. You can see this difference between banks just by comparing their websites.
Why is it better to avoid making the inquiries? Acceptances via all media, from mail to Internet, are shockingly low. Which do you think will get you more applications, and hence a lower cost of acquiring your new accounts:
"I authorize the Bank to obtain credit reports … " or
"We WILL NOT make an inquiry about you at any credit bureau"?
More and more consumers care about and are attentive to their credit scores. (It isn't "we," the banks, who have sold them on doing that!) Consumers are aware that inquiries can reduce credit scores. They are more likely to complete your form and accept your offer if you can assure them that doing so will not generate an immediate inquiry.
Andrew Kahr, Principal
Credit Builders LLC
Editor's Note: The author, a regular BankThink columnist, was the founding chief executive of Providian Corp. He can be reached at email@example.com.