FICO and others announce new scores, but will lenders be using them?

by 09 Apr 2015

Recently, FICO announced a new score system that is expected to be launched industry wide at the end of this year. This score is designed for those that are “unscoreable”, or have little to no credit history, and cannot get credit cards. This issue affects about 50 million people, or almost 25% of the U.S. population. Instead of being based on items such as credit history or delinquencies, this score will be based on telephone/utility payments and property records. According to FICO, they tested the model and for people with previously limited credit about 1/3 got above a 620 on the new score.

This is most likely a response to the many companies that have created alternative credit scoring. There are companies such as Vantage Score that already offer a credit evaluation for people with limited credit based on other data. And there are even companies like RevolutionCredit that offer a credit evaluation based on online courses/tests they provide on financial education.

However, consumers need to be educated and aware that it’s still important for them to build up a traditional FICO credit score. Most mortgage banks and lenders are not using these alternative credit scoring systems, and there are strong indications that the new FICO score will not be widely used.

To start, banks utilize FICO’s traditional scoring models for over 90% of consumer credit decisions, and it’s extremely unlikely they will overhaul this model for a new one.

In addition, there are issues of costs for the new model. FICO will be charging extra for their new product, and banks already have a very limited budget for credit scores. For example, when a bank requests a FICO score for a credit card applicant and the applicant has limited credit, they will have to select an option to pay extra to get the new score. In addition, many banks already have their own method in place for evaluating “unscoreable” customers without having to use this new score.

As a real estate/financing professional, it’s also important to make consumers aware that traditional FICO scores are always needed for mortgages and other large financing. For those banks that do adopt the new scoring system, it will only be used for initial credit card approvals. You can gain customer loyalty and bring value added by making sure consumers are aware of their FICO score, and if they have limited credit you can direct them to us to educate and help them build a credit profile.

Tracy Becker is the CEO and president of Credit Restoration and Education at North Shore Advisory Inc.



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