FICO Plans Big Shift In Credit-Score Calculations, Potentially Boosting Millions of Borrowers (#GotBitcoin?)

Consumers with a low FICO could get a higher UltraFICO, a new score that factors in bank-account activity as well as loan payments. FICO Plans Big Shift In Credit-Score Calculations, Potentially Boosting Millions of Borrowers

Credit scores for decades have been based mostly on borrowers’ payment histories. That is about to change.

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Fair Isaac Corp., creator of the widely used FICO credit score, plans to roll out a new scoring system in early 2019 that factors in how consumers manage the cash in their checking, savings and money-market accounts.

It is 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 UltraFICO Score, as it is called, isn’t meant to weed out applicants. Rather, 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.

The new score, in the works for years, is FICO’s latest answer to lenders who after years of mostly cautious lending are seeking ways to boost loan approvals.

This 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.

Borrowers currently have little control over what is in their credit reports, save for the ability to contest information they believe is inaccurate.

Lenders, collections firms and other parties feed payment-history data to the major credit-reporting firms, Experian PLC, Equifax Inc. and TransUnion, and that information determines consumers’ FICO scores.

Lenders, in turn, 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.

FICO said it is in discussions with a handful of lenders, including banks and financial-technology firms, that have expressed interest in using the new score in a pilot. One of those is Pentagon Federal Credit Union, the third-largest U.S. credit union by assets.

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 ultra-creditworthy borrowers. Yet that slice of the market, which has grown as the economy has improved, is largely tapped out.

As a result, lenders have been 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.

Of 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. Lenders may have different cutoffs, but Experian considers scores under 670 subprime.

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.

Consumers with an average balance of at least $400 who haven’t overdrawn in the prior three months would likely get a boost, FICO said.

David Shellenberger, FICO’s senior director of scoring and predictive analytics, said the new score is designed to prevent risky borrowers from appearing more creditworthy than they are, by reflecting positive financial behavior that was previously invisible.

FICO is “very focused” on its “ability to separate future good borrowers from bad borrowers,” Mr. Shellenberger said.

Some scores could decrease when the new information is taken into account, he said.

Experian will compile consumers’ banking information with help from financial-technology firm Finicity and will distribute the new score to lenders. The credit-reporting firm also will send lenders a report that includes a summary of the consumer’s bank accounts.

Experian will keep the potentially valuable cache of sought-after account information. The company said it would use the data to address consumer disputes about accuracy. FICO won’t have access to personalized account information.

UltraFICO is the latest in a recent series of changes by credit-reporting and -scoring firms that are helping boost consumers’ credit scores.

Equifax, Experian and TransUnion last year began deleting most tax-lien and civil-judgment information from credit reports. They also have been removing certain accounts in collections, following settlements with state attorneys general dating back to 2015 over how they manage errors and certain negative information on credit reports.

Eight million consumers who had collections accounts completely removed from their credit reports in the 12 months ended in June experienced a credit-score increase of 14 points on average, according to a recent Federal Reserve Bank of New York report.

FICO updated its scores in 2014 to put less weight on medical bills that are in collections and to exclude accounts that consumers paid or settled with a collection agency.

Updated: 9-14-2019

Need Cash? Companies Are Considering Magazine Subscriptions and Phone Bills When Making Loans

The way lenders decide who can borrow money is undergoing its biggest shift in a generation.

For decades, banks and other financiers have relied primarily on consumers’ borrowing history to make lending decisions. Now revenue-hungry companies are considering metrics both mundane and peculiar, like whether applicants shop at discount stores, subscribe to magazines or pay their phone bills on time.

Those experimenting with new metrics range from big-name banks like Goldman Sachs Group Inc., Ally Financial Inc. and Discover Financial Services to upstart financial-technology firms.

The changes are an about-face for many banks, which have spent much of the decade since the financial crisis chasing mostly ultra-creditworthy customers. But that pool is only so big.

The field of potential new borrowers is huge: About 53 million U.S. adults don’t have credit scores, according to Fair Isaac Corp. , creator of the widely used FICO scores. Another roughly 56 million have subprime scores. Some have a checkered borrowing history or high debt loads. But others, banks point out, just don’t have traditional borrowing backgrounds, often because they are new to the U.S. or pay for most expenses with cash.

Despite some signs that the economy is strong, such as low unemployment, it is also showing symptoms of wear. U.S. consumer debt is higher than ever, with many Americans forced to borrow to keep up with rising costs for cars, college, housing and medical care.

Christina Segura, 24, had a low credit score from unpaid medical debts when she applied for financing from fintech startup Meritize. But the company, which funds higher education and skills-based training, used her high-school transcript to approve her for loans totaling $9,000 to attend pipe-welding school.

Meritize considers factors such as improvement in grades and signs that students challenged themselves, said Chief Executive Chris Keaveney. The firm, he said, is “essentially proxying grit.”

Government officials at times have encouraged or even required changes to the information in credit reports and scores, reasoning they would bring loans to deserving borrowers who might not fit a traditional mold.

During the past few years, lenders including JPMorgan Chase & Co., Citigroup Inc., American Express Co. and Capital One Financial Corp. have been talking to FICO about whether incorporating new data into credit scores could boost loan volume, according to people familiar with the matter. Separately, lenders have been asking Experian PLC for ways to find new customers who are more financially responsible than their credit records suggest, according to people familiar with the matter.

The U.S. lending industry revolves around consumer data. Lenders feed information on their customers to credit-reporting firms Experian, Equifax Inc. and TransUnion , which compile lengthy dossiers on borrowers. FICO scores condense the data in those reports—such as payment track record and ratio of credit-card spending limits to owed balances—into a number between 300 and 850.

While changes at individual banks can affect slivers of consumers, the changes made by the credit industry affect a broad range of Americans.

Last October, for example, FICO announced it had developed a new score—UltraFICO—that factors in how applicants manage the cash in their checking, savings and money-market accounts. The new score functions as a sort of appeal: If an applicant’s traditional FICO score falls short, a lender can offer to have the score recalculated. About 37% of FICO’s revenue comes from the credit scores it sells.

And TransUnion says it sells alternative data to U.S. lenders that can include whether consumers subscribe to and pay for magazines. “It’s an indicator of stability,” said Mike Mondelli, senior vice president of global data strategy.

Credit scores have been the bedrock of consumer lending for decades. Fair Isaac created the FICO score in 1989, and banks adopted it broadly in the 1990s. Investors that buy securitized consumer loans—sliced-up pools of credit-card, auto and mortgage debt—often rely on FICO scores to assess their risk.

Critics say the changes could make millions of borrowers appear safer than they are, diluting the value of credit scores and reports. Others say the alternative metrics, like a consumer’s reliability in paying electric bills, don’t translate into a likelihood they will repay their loans.

Consumers with thin credit files are more likely to default on their loans, though the majority of them perform well, according to TransUnion. FICO estimates that about one-third of people who don’t have credit scores had a major negative event like a bankruptcy at some point in their past.

Goldman Sachs started making personal loans in 2016, part of a bigger move into consumer banking. Among other factors, it considers whether applicants overdraw their checking accounts.

A Goldman Sachs spokesman said the bank has “built a technology and data architecture that can ingest and use multiple sources of data to make the best decisions for the customer and the bank.”

Some would-be borrowers have low credit scores because of a limited U.S. borrowing history. Per Breivik said he had a credit score in the low 300s after he moved to Houston from London last year, and had trouble getting a credit card.

Mr. Breivik, who runs maintenance for a drilling company, turned to HSBC Holdings PLC. “I said, ‘We need to try to work something out. I have all this history with you guys,’” he said, referencing deposit accounts with the bank abroad.

HSBC reviewed his relationship with the bank, including his record of repaying an HSBC credit card he had before he moved to the U.S., and approved him for a U.S. card.

Some lenders are working with fintechs that assess consumers’ purchase data to determine risk. Fintech ZestFinance, for example, says applicants who spend more at grocery stores than on eating out tend to be a lower risk, as are those who shop at discount stores or are registered to vote.

Angel Hernandez, a 42-year-old maintenance worker, used cash for almost everything for much of his adult life. He has twice tapped Spring Bank for loans to pay for funeral and travel expenses when relatives died. Spring Bank, based in the Bronx, N.Y., lends to consumers with little to no credit history.

The bank verified Mr. Hernandez’s income with his employer. It also had him set up a savings account at Spring Bank where a portion of his paycheck was regularly deposited. Spring Bank made withdrawals from it to repay the loan.

Mr. Hernandez recently received his first credit card offers in the mail. He has since signed up for several cards.

Updated: 11-6-2019

Hairdresser, Plumber, Lawyer: A Job License Could Help You Get a Loan

Consumers who hold any of about 5,000 professional licenses could get a boost.

A new credit score will soon factor in consumers’ rent payments and professional licenses to help them get approved for loans.

The score, created by credit-reporting firm Experian EXPGY 0.45% PLC, is called “Lift” and can give borrowers a boost if they handle payday loans responsibly or are licensed as hairdressers, real-estate professionals or in other jobs. Those data sets aren’t typically factored into traditional credit reports.

Experian’s new score is the latest change aimed at helping lenders make more loans to consumers with no or limited borrowing histories. Lenders are looking to tap these borrowers after nearly a decade of mostly focusing on consumers with ultrahigh credit scores. Many lenders, though, are wary of extending credit to risky consumers and are instead looking for more data that could help them identify people they otherwise might overlook.

The potential field is huge. About 53 million U.S. adults don’t have credit scores and another roughly 56 million have subprime scores, according to Fair Isaac Corp. , creator of the widely used FICO scores.

Proponents of the new lending strategy say the changes signal lenders’ confidence in the economy and their belief that many consumers are judged too harshly by the traditional credit reporting and scoring systems. Critics question whether the moves are dressing up risky borrowers to look like safer bets than they actually are and whether this could lead to higher loan losses when unemployment begins to rise.

For decades, credit reports and scores have been based mostly on consumers’ history paying back debt. That began to change last year when FICO announced a new score that would factor in how consumers handle their bank accounts. Experian later said it would allow consumers to add their cellphone and utility bill payments in regular Experian credit reports, potentially increasing their FICO scores.

Experian will begin selling the Lift score to about 10 lenders in a pilot this month. The company says the score will help lenders decide whether to lend to potential borrowers who don’t have a regular credit score. Lenders can also use it as a second-chance score when a consumer’s regular score is too low, either because of a lack of borrowing history or because of delinquencies or other negative marks.

When consumers apply for a loan, they typically consent to let the lender pull their credit information from Experian or the other credit-reporting firms. Lenders would disclose if they plan to use the data that gets factored into the alternative score. Experian says the Lift score could help about 40 million consumers who might not otherwise get approved for loans.

The metrics can help lenders determine whether consumers are likely to repay their loans. For example, people who have a professional license tend to be more likely to pay their debts. Experian says it identified this correlation with auto lenders and credit-card issuers who have purchased professional-license data from the firm.

Experian’s priority with Lift is to increase the number of people approved, though the company says the new score can also help lenders identify people who might be riskier than their traditional credit records suggest.

The score ranges from 300 to 850, like the FICO scores that are used by most U.S. lenders for consumer underwriting. It isn’t meant to replace FICO or its competitor VantageScore.

Consumers won’t be able to control the new data that is incorporated into the Lift score. In addition to that data, the score will factor the information that is in consumers’ regular credit reports.

In some cases, Lift will factor in only positive information. On-time rent payments will be counted, but missed payments won’t be. Consumers who hold any of about 5,000 professional licenses—including hairdressers, real-estate professionals, plumbers, physicians and lawyers—could get a boost.

While most loan payments are factored into regular credit scores, Lift will add in loans that are often left out, such as payday loans and high-cost installment loans that often have triple-digit interest rates. These loans are often the only options available to consumers with no and low credit scores. Many consumers default on these loans. Lift will factor in both positive and negative information about them.

Updated: 1-23-2020

FICO Changes Could Lower Your Credit Score

Credit-scoring company Fair Isaac is making changes that will create a bigger gap between consumers deemed to be good and bad credit risks.

Changes in how the most widely used credit score in the U.S. is calculated will likely make it harder for many Americans to get loans.

Fair Isaac Corp., FICO 0.41% creator of FICO scores, will soon start scoring consumers with rising debt levels and those who fall behind on loan payments more harshly. It will also flag certain consumers who sign up for personal loans, a category of unsecured debt that has surged in recent years.

The changes will create a bigger gap between consumers deemed to be good and bad credit risks, the company says. Consumers with already-high FICO scores of about 680 or higher who continue to manage loans well will likely get a higher score than under previous FICO versions.

Those with already-low scores below 600 who continue to miss payments or accumulate other black marks will experience bigger score declines than under previous models.

The changes are an about-face from recent years, when FICO and credit-reporting companies made changes that helped increase scores for some consumers, such as removing some negative information, including civil judgments, from credit reports.

Credit scoring and reporting companies also recently started factoring in such information as bank account balances and utilities payments to help give consumers with limited credit histories a better shot at getting loans.

Those recent moves can help revenue-hungry lenders identify more creditworthy consumers and make it easier for them to be approved for loans. Average FICO scores have been rising steadily following some of these changes and an improving economy.

The U.S. consumer borrowing industry revolves around companies such as FICO, which help lenders decide whom to lend to. Credit-reporting firms including Experian PLC, Equifax Inc. and TransUnion collect data on consumers and compile it in consumers’ credit reports, which then determine their FICO scores.

The new FICO changes reflect a shift in U.S. lenders’ confidence in the economy, which has been expanding for more than 10 years. Consumer loan losses remain low compared with during the last recession, but consumer debts are at record highs, with many Americans forced to rely on debt to help fund their everyday lives.

Lenders in recent years had asked the credit-reporting and scoring companies to help them find more borrowers. But lenders are also trying to balance the need to expand loan volume with a rising concern about the longevity of the economic recovery and whether credit scores are making some consumers appear more creditworthy than they are.

“There are some lenders that see there are problems on the horizon in terms of consumer performance or uncertainty [about] how long this [recovery] is going to go,” said David Shellenberger, vice president of scores and predictive analytics at FICO. “We definitely are finding pockets of greater risk.”

On an earnings call last year, Capital One Financial Corp. Chief Executive Richard Fairbank warned that consumers across the industry might not be as creditworthy as their scores suggest.

Missed payments and most other negative information that would hurt a score typically roll off a report after seven years, which means lenders might not have insight into how a consumer fared during the crisis, he said.

The changes will affect new versions of the FICO scores. FICO updates its scoring model every few years to reflect changes in consumer borrowing behavior and performance. When it last announced such changes, in 2014, they were viewed as likely to help boost consumers’ credit scores.

Whether to adopt the new FICO scores will be up to lenders, which can generally decide which version of FICO to use or whether to use a competitor such as VantageScore. (There are some exceptions: For example, most lenders use a certain version of the FICO score to sell mortgages to Fannie Mae and Freddie Mac. )

One of the new versions, called FICO 10 T, will place greater weight on recently missed payments. Consumers who fall behind or stop paying their debts are likely to see their credit scores fall more with this model. Those whose last delinquency is at least a year old could see an improvement in their scores.

The changes are meant to partly offset the effects of settlements between credit-reporting firms and states that date to 2015. Those settlements, aimed at removing erroneous information from credit reports, resulted in Equifax, Experian and TransUnion removing most tax liens and judgments from reports.

Unlike previous FICO scores, 10 T will assess how consumers’ debt levels have changed during the past two or so years. FICO scores so far have reflected consumers’ balances during roughly the most recent month tracked. This change will place more weight on rising debt levels.

Consumers who previously paid their credit-card bills in full but shift to carrying growing balances for several months will likely end up with a lower score. On the other hand, consumers who tend to increase card debt during a specific month each year and then pay it off quickly will likely experience a smaller drop in their score than they currently do.

The changes will likely hurt scores even more for consumers who have a high “utilization” ratio—for example, when credit-card debt is nearly equal to a consumer’s set spending limit—for a sustained period of time.

FICO for the first time will place more weight on personal loans in a way that penalizes some borrowers. For example, consumers who transfer credit-card debt to a personal loan but continue to rack up credit-card balances will likely experience a bigger drop in their credit scores.

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