| Gartner Says Online Lending Industry Needs to Correct Credit Scoring Methods |
Internet Users Can Damage Their Credit Scores
by Inquiring About Loans Online |
Stamford, Conn., March 27, 2000 — Consumers have found the Internet to be an effective tool in finding competitive rates for loans, but while doing these searches online, many consumers are damaging their credit rating, according to Gartner Group, Inc. (NYSE: IT and ITB). As consumers look for some of the best interest rates on various loans, the number of inquiries into a consumer's credit report can cause a decline in the consumer's credit score.
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In order to minimize costs, lending institutions are relying increasingly on automated loan processing, which in turn is based on the borrower's credit score. However, the algorithm upon which the scoring is based reduces the consumer's score when multiple inquiries are made within a period of time. Gartner analysts said sometimes the borrower's credit score declines so drastically because of these inquiries, that the applicant must wait months before being eligible for the same rate again.
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"Today's credit scoring algorithm is not appropriate for online credit and lending applications, and it must be revised before it seriously undermines consumers' trust and retards the growth of e-lending," said Rasha Elass, industry analyst for Gartner's e-Business Services.
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The brick and mortar part of the industry has addressed this issue in the past and modified it enough to suit its needs. A borrower rarely waits for more than two weeks to find a rate through a brick-and-mortar mortgage broker, and the modified credit score will reflect only one inquiry into the borrower's report during that time. However, online consumers expect to shop as often as they want for as long as they please before deciding on a lender. It is this behavior that will needlessly decrease their score.
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Already a number of major lending institutions use a fully automated credit assessment for their online borrowers, a selection process that relies primarily on credit scoring. "As online lending institutions examine ways to lower origination costs in order to be competitive, even more lenders will look to using fully automated credit assessment methods," Ms. Elass said. "Like everything else, the credit score must change to fit into the new economy."
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More than 13 million U.S. consumers have applied for new credit cards, mortgages, and auto loans and even more have researched for loans online. Nine million U.S. consumers have applied for credit cards, about 2 million U.S. consumers have applied for auto loans, and a small number have applied for mortgages online.
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This information is produced by Gartner's e-Marketing: Credit and Lending U.S. program. This program provides in-depth research and analysis on the key opportunities, trends, and issues in the market for electronic commerce for financial institutions.
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This program is part of Gartner's e-Business Resource Center. The e-Business Resource Center offers clients a single-source access to all qualitative Gartner research on e-business. This research includes analysis, advice, and research covering market intelligence, management and strategic issues, and e-business technology. This research is designed to help senior executives, strategic planners and investors capitalize on emerging opportunities by providing research and analysis on electronic commerce and Internet marketplaces. Additional information available on Gartner's Web site at http://www.gartner.com/public/static/home/ggebiz.html. To subscribe to Gartner's e-Business Resource Center, please call 800-419-DATA or 408-468-8009.
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Gartner analysts will provide additional analysis on the e-business marketplace during the upcoming Spring Symposium/ITxpo 2000 in San Diego, California, April 10-13. Spring Symposium/ITxpo 2000 will feature 130 strategic technology sessions led by Gartner analysts. The sessions will cover more than 25 tracks, including E-Business Transformation; Knowledge Management; Internet as E-Business Infrastructure; Security and Privacy: Application Development and the Internet; Mobile and Remote Access Network Strategies; and the Virtual Enterprise.
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Gartner's Symposium/ITxpo 2000 will also be presented in Florence, Italy, April 3-5, and in Cannes, France November 6-9. The conference will be held again in the United States, October 16-20 in Orlando, Florida. Symposium/ITxpo will move to Brisbane, Australia, October 24-27, and Tokyo, Japan, November 14-16. For more information on Gartner's Symposium/ITxpo 2000, call 1-800-788-1997, or visit the Web site at www.gartner.com/symposium. Members of the media can register by contacting Josh Lefkowitz at 212-320-2235 and jlefkowitz@tsicomm.com.
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About Gartner
Gartner, the world's premier business technology advisor, was founded in 1979 and is headquartered in Stamford, Connecticut. Gartner provides unrivaled thought leadership for more than 9,600 client organizations worldwide. It achieved 1999 revenue of $734 million and has 80 locations worldwide. Gartner's 3,400 associates, including 1,200 research analysts and consultants, help clients achieve their business objectives through the intelligent and efficient use of technology. For more information about Gartner's industry-leading research capabilities, services and events, please visit www.gartner.com.
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