FICO to Make Changes to Credit Scoring to Include Bank Account History
Inside Subprime: Jan 2, 2018
By Ben Moore
Last October, Fair Isaac Corp. (FICO), which created the FICO credit score, announced plans to roll out a new credit scoring system in 2019 that will become a factor in how borrowers manage their checking, savings, and money-market accounts. This change is expected to be the biggest shift in credit reporting, as well as the FICO scoring system, since the 1990s. The new score, which will be called the UltraFICO score, is not meant to “weed out” applications, but rather improve the number of approved borrowers for credit cards, personal loans, and other forms of credit. The UltraFICO score has been in the works for years and is FICO’s response to lenders’ desire to find ways to increase the number of loan approvals.
This change is coming at a time when the consumer-credit market appears healthy and strong. The unemployment rate across the country is at an all-time low and loan balances (which includes credit cards, auto loans, and personal loans) have hit record highs. This economic health has lenders looking for ways to keep growing their loan volume. Currently, borrowers have very little control over what appears in their credit reports, with the exception of the ability to contest any information they believe to be inaccurate. Credit lenders and collection agencies will send payment-history data to all of the major credit firms, which include Experian, Equifax, and TransUnion. This information is then used to determine the borrower’s FICO score.
For many, the UltraFICO score will open the doors for more lending opportunities as lenders will be able to utilize the score to determine financial credibility based on recent bank activity. Borrowers with a few hundred dollars in their bank accounts, with frequent transactions and no overdraws, will see their credit scores rise. The new score is designed to keep risky borrowers from looking more “creditworthy” than they actually are. David Shellenberger, FICO’s senior director, says that FICO is “focused” on improving its “ability to separate future good borrowers from bad borrowers.”
UltraFICO is just the latest in a string of changes made by credit-reporting firms. Last year, Equifax, Experian, and TransUnion all began deleting many tax-lien and civil-judgment information from credit reports. The credit bureaus also began removing some collection account information in response to settlements from 2015 over how the firms managed errors and negative information on consumers credit reports. The changes come at a time when many consumers are turning to payday and subprime loans to meet their financial needs, risking high interest rates and cyclical debt that has proved difficult to end. With UltraFICO, many consumers will be put in a position of more financial options.