October 29, 2018
An interesting story broke last week that could benefit some of our listeners with below average credit. Fair Isaac Corporation, the company responsible for the widely used FICO credit score, announced it would soon be testing a new score that takes a borrower’s bank account balances and cash management practices into account to supplement traditional credit score metrics. The goal of this new score is to provide a new path for people with borderline credit to qualify for loans or credit cards. Fair Isaac will partner with Experian, one of the big credit reporting bureaus, to test the new formula next year.
The current system of calculating a FICO credit score — the three-digit number that lenders use to evaluate a borrower’s ability to repay a loan — are based primarily on a borrower’s history of repaying mortgages, loans, and credit card balances. The new score, which Fair Isaac is calling UltraFICO, would take into account factors like how long accounts have been open, the frequency of activity, and evidence of saving.
A great question, Tom. Obviously, it would make many people nervous to let Fair Isaac or any company have access to your account details. Instead, UltraFICO would be offered to customers who were not otherwise able to qualify for credit or a loan with their traditional FICO score. Lenders would then have to get a borrower’s sign-off to collect information about their cash management habits and create an UltraFico score. Specifics like where you are spending money are currently not expected to be tested.
Fair Isaac Corporation has said the UltraFICO would likely be most helpful for people with credit scores in the high 500s to the low 600s, or those with scores just outside of a lender’s cutoff. Additionally, people who have limited credit history, like young people, and those who had a financial rough patch and are restoring their credit would likely benefit too. The company said that those who opt for UltraFICO could see their score jump 20 points if their banking behavior is deemed positive.
As always Tom, it is about the fundamentals. First, pay your bills on time. Because credit scores are designed to give lenders an idea of how reliable you are, the best thing you can do is be consistent. If you often forget the date or pay late, I would recommend signing up for automatic payments. You also want to pay close attention to your credit cards. First, you want to keep your credit card balances as low as possible, if not at zero. High balances and high credit usage — the ratio of credit used to credit available — will be noted. You also want to avoid having balances across a number of cards. Finally, review your credit reports regularly. With increased hacking and scammer activity, you want to be vigilant for false activity on your credit report.
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