Starting next year, Americans will be able to use a new kind of credit score to prove themselves to lenders, even if they don’t have a history of making on-time payments on a car loan, mortgage, or credit card.
“There’s long been a real interest among the banks to find a way to assign a credit score to folks who have never taken out a loan, so there’s a lot of work that’s being put into finding some way to predict the creditworthiness of folks who have very little credit,” said Matt Schulz, chief industry analyst at CompareCards.
FICO parent company Fair Isaac Corporation announced Monday a new model called the UltraFICO Score, which will augment traditional metrics of credit risk with voluntarily offered information from bank statements, like evidence of saving and on-time payment transactions. When it debuts in a pilot program next year, credit experts say the UltraFICO score will improve access to credit for people with so-called “thin files” who have little, if any, traditional credit history.
“UltraFICO helps lenders gain deeper insights into the credit risk of a prospective customer through a more comprehensive understanding of the consumer’s financial profile,” said David Shellenberger, senior director of scores and predictive analytics at FICO. “As uncertainty around future consumer credit risk is reduced, a lender can do a better job matching the right credit offer to the consumer.”
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Banking experts agreed. “More data produces better loans,” said Michael Moebs, economist and CEO of economic research firm Moebs Services. “The expansion of the consumer’s cash management detail in UltraFICO will open up the expansion of credit to those who do not have to have security to reduce risk, but have the cash to reduce risk.”
FICO’s Shellenberger said that giving lenders visibility into how people manage their bank accounts can be a good proxy for how they manage their finances in general. “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,” he said. For instance, customers who don’t overdraw their accounts are demonstrating positive money management traits even if they haven’t taken out traditional loans in the past.
“We see that consumers that don’t bounce checks or let their accounts slip into negative territory tend to be better credit risks,” Shellenberger said.
"Banks have been using this type of data about their own customers internally for years,” Schulz said. “Even though you may not have a credit score, the bank views you as less risky because they know other things about your financial situation, such as how much money you have in your account and how many times you've overdrawn your account."
Consumer advocates are cautiously optimistic that the new score will give people without traditional borrowing histories better access to mainstream financial lending products.
“It does look promising, but there are pitfalls to any development in financial services,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center. Wu said how consumer friendly the new UltraFICO is will depend on giving borrowers full control over their personal data. “Consumers opt in, which gives them more control than traditional credit reporting,” she said.
Borrowers will still have to use their own judgement to determine if they can afford to take on debt, experts say. “The FICO score is a process, not a tool,” Moebs said. “FICO was never intended to be judgmental.”
Lending institutions are eager to expand their pool of customers in a long-running economic recovery, and attempts to mitigate risk don’t always work as intended. “In good economic times banks want to lend but once times inevitably turn, then things get a little bit dicier, Schulz said. “Just because someone wants to lend you money doesn’t mean you should take it.”