FICO Introduces New Credit Score to Help Consumers

FICO (also known as Fair Isaac Corporation) proclaims that 90% of lenders use the FICO score for their lending decisions. To meet as many needs of their lender customer-base as possible, FICO has 49 different types of FICO scores. However, not all Americans can be scored using these scoring models; FICO has said that 53 million American are unable to be scored. To close the gap, FICO recently announced a new scoring system whose algorithm will allow 15 million more consumers to have FICO score. The new score, which currently does not have a name, is in its pilot phase and is being rolled out to 12 of the largest credit card issuers. The companies will use the system to identify new customers who would otherwise be unable to qualify for credit cards.

Why Someone Might Not Have a FICO Score

Even in this age of information, some people slip through the cracks. The main reasons why consumers cannot be scored with any of the existing systems:

• Some people don’t use credit on purpose because they don’t believe in having debt and prefer an all-cash existence.
• Others are just unscoreable due to lack of information; some 15% of credit files don’t contain enough information on their credit reports to calculate a score. Bad experiences with credit such as bankruptcies, collections, late pays may have left a bad taste in some people’s mouths and they are unwilling or unable to open up new credit lines, thus leaving them with no data to score.
• Lack of activity also causes consumers to have unscorable reports; 6 months without credit activity, even if accounts are open, causes the scoring model to fail.
• Some consumers fall into the category of “unbanked”. These consumers are unable to get a checking, savings or credit card account. The unbanked may have gotten into trouble bouncing checks and gained an entry in ChexSystems. An entry in ChexSystems will prevent most people from opening a checking or savings account. Such consumers often rely on cash or pre-paid debit cards to pay monthly expenses.

“Regular” FICO Scoring Systems

Regular FICO scores are calculated using certain kinds of data: payment history of mortgages, credit cards, auto loans and personal lines of credit. The scoring algorithm also takes into account negative data such as bankruptcies, judgments and collections. This kind of consumer information is stored at credit reporting agencies; the best known and the ones that FICO uses are the big three credit reporting agencies: Experian, Equifax and TransUnion. Consumers have a separate FICO score for each of the three credit reporting agencies.

What Information will be Used to Create the New FICO score?

Absent from consideration in regular FICO scoring models are the payment histories of bills many Americans pay every month, such as rent, utilities and cell phone bills. The new FICO model will be scored using alternative data sources containing this information. Change of address also plays an important role: in the new model, frequent changes in addresses will lower the FICO score.

The new FICO score, like its traditional cousins, will have a FICO score range of 300 – 850.   FICO estimates that one third of the 15 million additional individuals which could be scored in the new model will have a FICO score above 620. 620 is the minimum score that many lenders require to approve credit cards, auto loans and mortgages in the regular FICO scoring system.

Where is FICO getting this Alternative Information?

This is not the first time FICO has attempted creating scores from alternative sources. The previous attempt (the FICO Expansion Score, issued in 2007) failed to gain traction with lenders. The FICO Expansion Score was shunned by lenders after the Great Recession; they were most likely not eager to expand their exposure to risk at that time. This time, to ensure wider acceptance, FICO looked for data sources which encompass a large breadth and depth of information, making the resultant risk assessment more readily apparent. FICO, which has been working on this system since 2013, had several criteria for their alternative data sources:

• The data repository needs to be compliant with the Fair Credit Reporting Act (FCRA); mainly, the repository must have processes in place for investigating and resolving consumer disputes. In addition, safeguards and procedures must be in place to ensure accuracy of repository’s data.
• The information needs to have depth; the data must report both on time and late payments and must start from the beginning of service to the end, including address changes.
• The database must cover the majority of consumers in the U.S.
• The data should be enough to predict future payment history. If someone always pays their cell phone bills on time, statistics show they will be more likely to pay their credit card bills and other financial obligations in a timely fashion.

FICO chose to work with LexisNexis and Equifax to gain access to alternative data. Both Equifax and LexisNexis are already FCRA compliant and have a large consumer information base. LexisNexis data repositories contain information about public and property records; Equifax data repositories contain telecommunications and utility bill payment histories.

Path to “Regular” FICO

Should a consumer be issued a credit card because of the new scoring system, payment history on the new card will be reported to the credit bureaus. Once 6 months goes by and the consumer has made all on time payments, they will now have enough data to be scored in FICO’s regular system, and can be eligible for other types of credit cards and loan products.

Other Financial Institutions are Interested in the New FICO score

Though the new FICO score is mainly targeted at specific credit card issuers, other types of lenders have expressed interest in the score. As with credit card issuers, banks are always looking for new customers to whom to issue new credit in order to boost revenue, but of course are only willing to lend to those with acceptable risk. Should the pilot program go well at the 12 credit card issuers, FICO will have other customers for its new scoring model.