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.
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.
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. FICO Plans Big Shift,FICO Plans Big Shift,FICO Plans Big Shift,FICO Plans Big Shift,FICO Plans Big Shift