Have you ever wondered what the impact was of automated payments on your credit score? Google didn’t bring up very much information and in fact, very little research has been done on the subject.
There is, however, an interesting survey conducted by the Rand Corporation on the impact that credit scores have on auto lending.
Credit scoring was started by the Fair Isaac Corp. in the late '50’s. But it was the technology revolution of the 1990s that provided companies enough data storage and computing power to analyze loan portfolios within some sort of credit score. The auto-financing company Rand studied used uniform pricing and traditional interviews for loan issuance.
Through the Rand Corp. study it was possible to identify two distinct channels through which better information improved loan profitability. First, credit scoring allowed the lender to set different down payment requirements for different applicants. High-risk applicants saw their required down payment escalate by more than 25%, making it harder to obtaining financing. Both closing rates and default rates for this group fell notably, which was consistent with the idea that higher-risk borrowers were screened out by the higher down payment requirement.
When it came to lower-risk applicants, required down payments and close rates changed little. Rather, car quality and average loan sizes increased substantially. Default rates did not change much, and the larger loans had a substantial profit impact due to the high interest rates charged in this instance. For lower-risk loans, the increased amount of each investment is largely responsible for the dollar increase in profit.
In essence, in the Rand study we can see a microcosm of what has happened in the larger economy over the past few decades. People with steady payment histories and low levels of outstanding debt relative to their available credit received better loan terms, and were therefore able to borrow more money because their interest rates dropped. They got bigger, fancier cars, and auto lenders became more profitable.
Those with lower incomes, on the other hand, found that their financial lives got even more difficult. Their poor credit histories meant that they could no longer get loans, or they could get them only at painfully high rates of interest. They would have had to drive less car -- or, possibly, only whatever they could afford to pay cash for.