How The New FICO Model Could Help Consumers

I don’t think I remember a day where my FICO score didn’t define me as a human being.  Alright, maybe when I was carefree Toddler Moneyman, but the vast majority of my life has been spent worrying about that magical number that opens so many doors.

That number has gone up, down, and up again.  Many hours have been poured into making sure that my credit report was correct after a divorce because, between the three major credit bureaus, information is very difficult to coordinate.

Some Background on FICO

The term FICO comes from the company Fair Isaac Corporation.  Fair Isaac Corporation created credit risk scoring in 1960 as a way for financial industries to expand their customers’ access to credit.

In order to have a FICO score, you need to have at least one account that has been open for six months or longer, and at least one account that has been reported to the credit bureau within the past six months.  There can also be no indication of “deceased” on the credit report, so if you share an account with someone who has passed away, you may need to close the account in order to establish your FICO score.

One point to mention is that each of the three major credit score companies collects credit data about you, but they don’t share that data between themselves.  Many creditors may report to only one or two bureaus, so your score may vary by a few points between bureaus.

The numerical FICO score can range from 300 to 850.  Industry –specific scores can range from 250-900 and may be used to determine whether you can qualify for a loan to buy a home, purchase a car, or get a credit card.

There are varying levels to FICO scores as defined by lenders.  Lenders can define credit however they like, but the general guideline is as follows:

Excellent: 750 and higher

Good: 700-749

Fair: 650 – 699

Poor: 550-649

Bad: 549 and lower

Having bad or poor credit does not always preclude people from acquiring loans or mortgages, but they may incur higher insurance premiums or interest rates.

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How Is Your FICO Score Calculated?

Your FICO score is currently dependent on five areas which are payment history, credit utilization, credit age, different types of credit, and number of inquiries.

These areas are also weighted within the formula as seen in the image below.

Changes To FICO Scoring

As you can see, every part of the current FICO scoring system is based on credit accounts and lenders providing information to the credit scoring bureaus.  The upcoming change will also consider how you manage your checking, savings, and money market accounts.

It is estimated that this change to the FICO model will help boost the credit scores of some of the 79 million Americans who have poor credit histories.  It will also help some of the 53 million Americans who have no credit score under the traditional FICO model.

Fair Isaac Corporation is calling this new model the UltraFICO Score and, according to Sally Taylor-Shoff who is the vice president of score at FICO, they are trying to focus on financial inclusion.  FICO is claiming that the model can potentially improve access to credit for the majority of Americans who participate in it.  They also claim that consumers new to credit along with those who have had previous financial distress stand to benefit the most from the new UltraFICO Score.

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How Does The UltraFICO Score Work?

Basically, the new model can act like a booster for your FICO score if you need it.  If your credit score isn’t quite enough to qualify for a loan or credit card, the lender can activate the option to use your banking activity to generate an UltraFICO Score.

This means that if you are a bit thin on credit or have a borderline FICO score, you can boost it if you have a good banking history.  You even get to choose which bank account they use to create the UltraFICO Score.  Just make sure you choose an account that has a good history because your FICO score can actually decrease using the new model as well.

What Makes A Good Bank Account?

When choosing a bank account to use for the UltraFICO Score, you should choose an account that maintains an average balance of $400 and shows no negative balances in the previous three months.

The account should also have more deposits than outflows, have been open and active for a period of time, and be used to pay bills such as utilities and rent.

FICO claims that seven in ten people who demonstrate responsible banking behavior may improve their credit score under the UltraFICO scoring score by up to 20 points.

This could lead to more people being approved for credit cards and loans as well as people getting better interest rates and insurance premiums.

When Will This Happen?

The new model begins its pilot program in the beginning of 2019 and FICO plans to offer the scores to all lenders by next summer.  The big question, however, is whether lenders will adopt and use the new scoring model.

The UltraFICO Score will not be mandatory and will not be required to be offered by lenders.  This means that, if a lender does not want to offer the option to a customer, they don’t have to.

My Thoughts

I have some mixed feelings about the new UltraFICO Score model.  The FICO score is intended to determine the customer’s ability to handle credit and has always been based on their credit history.  This made since to me, it was comparing apples to apples.

Having banking information available to lenders and credit scoring companies also comes with security risks.  The Equifax breach proves that these companies are not bulletproof.  It is bad enough that they have your complete credit history along with everything that is contained in your credit report, but throw in your banking information, it seems to be a recipe for cyber-security disaster.

Another fear that I have is that many lenders will become predatory in nature when it comes to providing loans.  With the ability to “boost” the customer’s FICO score by up to 20 points using their banking information, they may be able to approve loans for people who may not necessarily qualify for those loans or mortgages.

Would this cause a debt crisis or housing bubble in the future when these mortgages are defaulted upon?  This is a complete speculation based on my pessimistic view of lenders, but it is not that far-fetched.

What Are Your Thoughts?

  • I’m intrigued if the boost in credit scores will impact the amount of loans that get approved. What if that person defaults on their loan because of the boost? Is that going to cause more troubles? Or is that already factored in? By that, I mean, is the old 750 the new 770?

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