Things might be changing for the better when it comes to FICO scores in 2019. For decades credit scores have been based on borrowers’ payment history; from mortgage to credit card payments.
Fair Isaac Corp is the creator of the widely used FICO credit score and has plans to roll out a new scoring system in early 2019. This new system will factor in how consumers manage the cash in their checking, savings and money-market accounts and will be among the biggest shifts for credit reporting and the FICO scoring system, the bedrock of most consumer-lending decisions in the U.S. since the 1990s.
The new scoring system will be called UltraFICO Score. It isn’t meant to weed out applicants, it is designed to boost the number of approvals for credit cards, personal loans and other debt by taking into account a borrower’s history of cash transactions, which could indicate how likely they are to repay. This has been in the works for years; it is FICO’s latest answer to lenders who after years of mostly cautious lending are seeking ways to boost loan approvals.
This new system is occurring at the same time the consumer-credit market appears relatively healthy. Unemployment is low and consumer loan balances—including for credit cards, auto loans and personal loans—are at record highs, and lenders are looking for ways to keep expanding loan volume.
We as borrowers currently have little control over what is in our credit reports, except for the ability to contest information they believe is inaccurate. Lenders, collections firms and other parties are fed payment-history data to the major credit-reporting firms, Experian PLC, EquifaxInc. and TransUnion, and that information determines consumers’ FICO scores. Lenders use FICO scores to help make most of their lending decisions.
The UltraFICO score will function as an appeal of sorts, likely boosting many applicants with less-than-ideal records. If an applicant’s traditional FICO score falls short, a lender can offer to have the score recalculated to reflect banking activity. Would-be borrowers with at least several hundred dollars in their accounts, who have had the accounts for a while and who transact frequently and don’t overdraw are likely to see their scores rise, FICO said. Applicants will be able to choose which accounts they want considered when the score is recalculated.
A decade after the subprime-mortgage binge nearly brought down the U.S. financial system, consumer lenders remain wary of borrowers with low credit scores. Banks have spent much of the past 10 years chasing creditworthy borrowers. That slice of the market, which has grown as the economy has improved, is largely tapped out.
All this has lead to lenders asking credit-reporting firms and FICO to figure out a way to help them boost lending without taking on significantly more risk. And regulators have expressed interest in exploring ways to increase access to affordable lending for consumers who have no or low credit scores.
This is an interesting fact – Of all the U.S. consumers with FICO credit scores, a record 58.2% have a score of 700 or higher on a scale that tops out at 850. The average FICO score is at a record 704. FICO said about seven million applicants who have low credit scores as a result of thin borrowing histories would likely see their scores improve under the new system. Separately, some 26 million subprime borrowers will end up with higher credit scores, FICO said, with nearly four million seeing an increase of at least 20 points.
UltraFICO is the latest in a recent series of changes by credit-reporting and -scoring firms that are helping boost consumers’ credit scores.
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