Getting a Great Deal - Most dealers know that it’s crucial to run a credit report before signing up a new account. But it’s also worth remembering that it’s not a minor detail, and even a borderline credit record may have long-term repercussions.

Getting a Great Deal

Credit counts in a balanced portfolio

Your sales rep knocks on the door of a nice home in an upscale suburban neighborhood. There’s an expensive car in the driveway, the landscaping is immaculate, and it looks like it could be in the middle of a city park. It seems like a good place to make a sale, and there’s no doubt that the rep has to give it a shot. But keep in mind that appearances aren’t everything: Not everyone who has a nice home and a luxury car in an upscale neighborhood can actually afford it.

Most dealers know that it’s crucial to run a credit report before signing up a new account. But it’s also worth remembering that it’s not a minor detail, and even a borderline credit record may have long-term repercussions.

That doesn’t mean you have to ignore every potential customer with a less-than-stellar credit report. But to create a successful, sustainable portfolio with dependable RMR, you can’t afford to throw too many into the mix.

Understanding FICO

Start by making sure your sales reps understand what a FICO score is, how it works, and why it’s important. Virtually every consumer has heard the term, but very few can actually tell you what it is.

FICO isn’t a credit reporting firm. It’s actually a software development company that created a formula for measuring consumer credit risk. The first FICO algorithm appeared in 1987, and it’s currently used more than 10 billion times a year to predict which consumers are most likely to be favorable credit risks. There are three major sources for FICO scores—TransUnion, Equifax and Experian—though there generally isn’t a great degree of variation between the three providers.

The algorithm is simply a way of using numbers to determine lending risks, rather than just a hunch or a gut feeling. The exact formula has never been revealed, but it’s generally acknowledged that 35 percent of the score is determined by payment history (paying on time, repossessions, liens, and so on), while 30 percent is determined by debt burden (how much debt a consumer has).

That means as much as 65 percent of what makes up a FICO score is directly related to the services you offer. Does the customer have high potential for slow-pay or no-pay? And does the customer already have so much debt that adding a home security contract will just add more straw to the camel’s back?

There are actually several different types of FICO scores, depending on whether a person is applying for a bankcard, installment loan, auto loan or just generic (or classic) financing. The generic score has a range between 300 and 850; the higher the number, the lower the risk.

Risky Business

Barbara Holliday, senior director of Dealer Services for Monitronics, says that credit score is the best indicator for determining the likelihood of timely customer payments and contract renewals. Monitronics stresses to companies in its dealer network that roughly 1 in 4 customers with credit scores between 600 and 625 will default on their payments, and that many of these customers will fail to pay within the first year.

“Monitronics places a great deal of emphasis on consumer credit scores,” she said. “We help our dealers by giving them access to online tools that provide them with the average score of their customer base, and the percentage of their customers by credit range.” Armed with this knowledge, she said, dealers can make informed decisions about how to structure their portfolio on an ongoing basis.

“Low credit scores are risky business,” Holliday said. “When the ratio of customers in the 600 to 650 range and the 700-plus range are off balance, even the best companies can’t succeed.”

Careful Consideration

Not all low credit scores are automatically out of the picture, but keep a close eye on how they fit into your overall portfolio. If you notice that sales reps are bringing in customers with FICO scores that are consistently in the low- to mid-600s, you run the risk of being weighted too heavily to the negative side. As those customers default, you’ll be forced to scramble for replacements.

Make sure low scores constitute a relatively low portion of your portfolio, and if you do decide to overrule a FICO score, try to build in ways of protecting yourself in case of default. For example, ask for more money up front, or put the customer on an autopay plan that takes the monthly payment directly from their checking account, and not their credit card.

“Once you recognize the risk and lack of value of low credit score customers, you can make proactive changes in your marketing, sales approach and approval processes that will approve your bottom line,” Holliday said. “There are many creditworthy customers in the marketplace, and when you walk away from a low-score account, you strengthen the viability of your company.”

In other words, sometimes the best customers are the ones you don’t sign up.

This article originally appeared in the November 2015 issue of Security Today.

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