Using credit scores with your database.

• Author: Coffey, John J.
• Position: Database Marketing

Bankers and customers sometimes think differently about the same things! For instance, a loan is a liability for the customer--but it's an asset for the bank. However, the customer's loan could become a liability for the bank if the customer fails to pay it back. In light of this, a loan officer will review the customer's "credit score" to determine his or her creditworthiness before making the loan.

The most common credit score today is the FICO score (an acronym for Fair Isaac Credit Organization) named after the company that developed the scoring. The three major credit reporting agencies, Equifax, Experian and TransUnion all use FICO scores; however, each has its own brand name for these figures. For instance, Equifax calls its FICO scores "BEACON" scores.

The FICO score is a mathematical formula that takes into consideration the customer's payment history, amounts owed, length of credit history, new credit and types of credit. The score ranges from a low of 300 to a high of 850. A customer with a low score poses a high credit risk and will be charged a higher interest rate, while a customer with a high score is a lower credit risk and will be charged a lower rate. For instance, a customer with a FICO score of 500 could be charged 2.91 percent more interest for a 30-year fixed mortgage than a customer with a score of 720 or better.

Uses of credit score data

In order to use FICO scores within your marketing database, you will need to ship an extract of your data to a credit agency. After they score your data, you will need to append it back into your marketing database.

Because a FICO score is a numerical value, it is ideal for use within your marketing database as a segmentation tool. Statistically, customers can be segmented into one of five groups based on their score: below 620; 620-690; 690-745; 745-780; and above 780.

It's important to know that traditional direct mail strategies have been targeted to customers with FICO scores between 680 and 780. If customers have a score below 680, they are a potential high credit risk; and, if their score is above 780, their response rate is low. Either extreme lowers your campaign's profit margin.

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