Once they get that list generated, they'll typically use other types of scores to further refine the list. They can certainly use bankruptcy scores, so scores that predict the likelihood of somebody filing a bankruptcy. Equifax has probably the most commonly known and most commonly used bankruptcy score. It's called the bankruptcy navigator index, or BNI.

You'll certainly have lenders utilize what's referred to as a response model -- what's the likelihood of you responding to one of those offers that they mail to you.

You'll certainly have them use revenue scores -- what's the likelihood, if you do respond and become a customer, that you'll generate positive revenue.

Now that you've actually responded to one of those offers and filled out the application and mailed it back in, the issuer will commonly pull what's called a back-end report to set the final terms of the card, because most of the terms that are sent in the marketing pieces are conditional terms -- you know, up to $50,000, a rate as low as 7.9 percent. They're tempting you, but they're not actually giving you a firm offer until you actually fill out the application and mail it back in. They'll pull a back-end credit report and/or another credit score.

How is a back-end report different from a regular credit report?

It's just a credit report -- back-end just refers to where in the process it takes place, it means it's on the back-end of the prescreen process. But it's the same credit report that you and I can see when we go to pull our own credit reports. It's no different.

So, they'll use a traditional FICO score in that case as well. There's a variety of different FICO scores, (called) the industry-adjusted versions of FICO. There's a bank-card version, an auto loan version, a personal finance version and then an installment loan version. Most of the large credit card issuers use the bank-card version, so even though it is a FICO risk score, it's the bank-card-adjusted version of it, meaning that it's more refined for bank-card issuers.
How is that different from the FICO scores that consumers can get?

The one that consumers can get is just the general-use FICO score, so kind of the vanilla version of the FICO score. There is nowhere that a consumer can get the bank-card version. It's not for sale anywhere -- myFICO, or at any of the bureaus. It's simply not a product that's sold to consumers. Really the only difference between that score and the general FICO score is that it modifies what your score would be based on -- expected performance with a bank card. It's kind of like a semi-customized model.

Would there be a huge difference between the two scores?

Not huge -- when I think huge, I think 100, 200 points. You're likely to see the score be within plus or minus 20, 30 points. It's not a colossal difference, but it is a difference.

Using the credit card
Now we've just processed this application that was mailed back to us. We've used a score to set the final terms and now we've mailed the card to the consumer. The consumer calls in and activates the card and goes to a merchant and uses it for the first time. The transaction is scored. The score is, in many cases, used to determine whether or not the issuer wants to approve the transaction. In other words, is Leslie McFadden trying to buy a $5,000 television using a credit card with a $1,000 credit limit? Well, they're going to decline that transaction because you failed their criteria.

A look at risk scores

So, now that you're an existing cardholder and you're using it, you're either revolving a balance month over month or you're paying in full. Every single month that you have the card, the credit card issuer is calculating what's called a behavior score. A behavior score calculates just the activity on that one card, not anything else that has to do with your credit. What they're doing there is essentially taking your temperature on a month-to-month basis to determine, is Leslie McFadden's risk changing? Do we need to modify the terms of her account? Or do we just need to let her be? Is there something we can do to entice (her to) use the card more? Because remember, they're trying to make you into a profitable customer using all means necessary to do so.

A behavior score can also be used when it comes time to reissue the card. Do they want to give Leslie a credit limit increase? Do they want to give her a credit limit decrease or do they even want to reissue the card? Do they want to reissue the card and start sending you convenience checks or balance transfer checks? They use that behavior score for a variety of purposes, but specific to just that one card.

Negative cardholder behavior
Now, let's say Leslie's had the card for a year and she's never used it, so now she's not really generating any revenue, then they'll use a tool called an attrition score. They'll score your credit report with this attrition score. What they're trying to find out here is, is Leslie ever going to use the card? Have we been a victim of attrition, meaning that she's chosen to use another card in lieu of ours? If so, do we want to take aggressive means to try to get Leslie back as a customer? Or do we want to just choose to let her off in another direction and essentially choose to lose her?
Now let's say that Leslie has a huge balance and she's also got huge balances on other credit cards. She's starting to miss payments on other credit cards, and during the month-over-month process of account management, I notice that your FICO score has gone down and I'm little concerned about that. So I'm either going to close your account, reduce your credit limit, increase your interest rate or a do a variety of the other nasty things like lower your grace period, start aggressively calling you if you're over a day or two late. It's just the same general-use FICO score, the bank card score, but it's just another use of it.

Now Leslie has gone into collections because she just isn't paying her bill, and we've sent it off to a collection agency because we're tired of sending her notices in the mail. She's ignoring them. Now the collection agency is using a collection score to determine the likelihood of Leslie paying any of that money back. If her collection score is very, very bad, then they may not spend the money and time and resources to try and collect it. They may just send collection letters to you and just put it on your credit report and then eventually sue you. Or if your collection score is very, very good, they know that they have a good shot at recovering something, so they may put one of their junior collectors on it or call you instead of just sending you letters, so they're going to vary their actions to collect based on what their collection score is.

What information are they using to come up with a collection score?

Credit data. Let me give you an example. Let's say that Leslie has a $5,000 collection. One of the legal reasons or the legal permissible purposes to pull someone's credit report is the act of collecting a debt. The collection agency can pull your credit report. That's completely legal. If they notice that Leslie has a credit card with a $20,000 limit and a zero balance, she has the ability to pay that $5,000 collection because she can just charge it on the other credit card. The collector doesn't care that that's a bad financial move, and it's foolish for you to do that because you're really just robbing Peter to pay Paul. That will be counted in your collection score. You have the ability or capacity to pay the collection, so they'll know this and they'll use it in their strategy when they're trying to entice you to pay. "Hey, why don't you just charge it?" or "Why don't you just give us the card number and we'll charge a thousand dollars a month for the next five months?" Those are the types of deals they'll try to offer you. That'd give you a good collection score.

A look at risk scores

The bigger the bank, the more likely they have a variety of custom models built within their app-processing systems and account management systems. Almost every single one of them uses FICO as an input.

Let's say that Leslie McFadden's $500,000 salary equals 50 points and the fact that she's lived at the same address for 10 years equals 50 points. The fact that she's been in the same industry for 15 years means that it's worth 50 points. The fact that her FICO score is worth 796 is also worth 50 points. You can give points for certain things. It's used as a variable within the model.
All of those models I just mentioned to you -- the bankruptcy score that Equifax builds, the variety of FICO scoring models, the behavior scores, the attrition scores, the collection scores, response models -- a lot of those are what are called shelf models, meaning they're on a shelf somewhere and all you have to do is tell one of the credit bureaus, "Hey, I want to start buying that score" and they'll just start putting it with your deliverable. They're built for general use, meaning that anybody can buy them and as such they're inexpensive -- there's no maintenance with them at all because either the bureau does the maintenance or FICO does the maintenance and they're very easy to use.

Someone like a credit union or a small regional bank -- they will depend almost exclusively on those prepackaged credit scoring models, like FICO, because they just simply don't have the money to go out and contract with someone to build a $3 million custom score and then have to rebuild it every 24 months because they get stale.

Now when you get into the big boys -- we all know who they are, the really big lenders and the credit card guys -- they don't want to just simply depend on a shelf model that everyone else is using, they want something that's customized specifically for them because of the performance. They may have a custom response model, they may have a custom risk score, they may have a custom attrition score, they may use a custom collection score, they may have a staff of people internally who build all these models themselves -- an entire operations, research and analytics team -- and some of them do that versus outsourcing it. Some of them would rather pay someone else to do it. It's just a matter of what their appetite is.

Other scores
Are those all the scores that are out there?

No. There are also insurance scores that predict the likelihood of you filing a claim, or predict the likelihood of you being a profitable insurance customer. Fair Isaac builds those and a company called ChoicePoint, which was just acquired by Lexis/Nexis. Those use information off of your credit report and also previous claim data. ChoicePoint actually houses a claim database. They'll use that data in addition to your credit data.

A look at risk scores

A lot of application scores use a credit score as an input. Kind of like an insurance score, where it uses insurance data and credit data -- well, this