If credit is a challenge for you because of a lack of established tradelines and accounts, a big help will be coming next year, thanks to FICO.
According to the nation’s preeminent credit reporting firm (of the Fair Isaac Corporation), U.S. consumers will benefit from a new and different kind of credit score that will particularly come in handy for potential borrowers who are trying to deem themselves credit worthy to lenders but have a “light” credit history.
Without an established mortgage, credit cards, a car loan, or an established history of payments to report, tens of millions of Americans are considered “light” or even “credit invisible.”
Called the new “Ultra Fico Score,” these consumers will now have additional alternatives to prove themselves worthy of new loan approvals and credit accounts.
According to Jim Wehman, executive vice president of scores at FICO, the new scoring model – released in conjunction with Experian – will be a “game changer” for these folks.
For instance, with this New Ultra Fico Score, a borrower’s banking history can help fill out their credit file. Up until now, banking has no effect on credit scores, and bank account information does not even report.
It’s no wonder why this pilot program that’s rolling out in 2019 has been called the most significant change to Fico’s scoring model in the last thirty years!
Working on a voluntary basis, Fico can collect data from a potential borrower’s bank account as a metric to gauge and assess their potential risk with new loans; which is the whole function of credit scoring.
The new Ultra Fico Score will take into account:
- Bank account balances
- How many bank accounts have been opened in the past 6-12 months
- The ratio of newly opened accounts to established accounts
- Length of checking account history
- Transaction frequency
- Overdraft history
- Recent credit inquiries (and how long it’s been since they were made)
Reportedly, Ficos’ New Ultra Scoring system will look for checking or savings accounts with at least $400 balances.
According to David Shellenberger, Senior Director of Scores and Predictive Analytics for FICO, “Ultra FICO helps lenders gain deeper insights into the credit risk of a prospective customer through a more comprehensive understanding of the consumer’s financial profile. As uncertainty around future consumer credit risk is reduced, a lender can do a better job matching the right credit offer to the consumer.”
Shellenberger went on to illuminate Fico’s reasoning for the new scoring model, since how a person manages their bank accounts has proven to be a good predictor of how they’ll manage credit, like credit cards, auto loans, and more.
“We see that many of the predictive characteristics in our model reflect the experience that a consumer is able to demonstrate in managing their financial affairs,” said Shellenberger.
Banks have actually formulated this same data internally for years and years, as they understand that if a customer goes negative in their balance, regularly overdraft their checking, or otherwise mismanage their bank accounts, they are more likely to max out credit accounts, miss payments, and default.
Of course, the New Ultra Fico Score won’t help everyone, as most lenders will use traditional credit scoring models. For instance, the mortgage industry will probably remain unaffected since Fannie and Freddie use a scoring model that’s been in place for almost 15 years, and are not expected to make a change.
However, Fico does see a key role for their Ultra Fico, as they point to the fact that 7 out of 10 Americans who responsibly manage their banking may benefit from higher credit scores, accordingly.
Watch this video about UltraFico from Jeff Sipes, President of Blue Water Credit.com