If you've ever applied for a loan or a credit card, chances are you've had your FICO credit score checked by the lender.
This credit check looks at how well you manage your debt by doing things like making your payments on time, not running up the balance on your credit cards too much, etc. Lenders use it as a major decision factor when deciding whether to approve you for a loan or not.
This is the way things have been working for decades. And it's a system that's generally worked well for lenders. But there's just one problem: FICO scores don't accurately capture the entire picture. And that's where the new UltraFICO score comes in.
The Problem With FICO Scores
Here's the crux of the problem: many Americans have less-than-stellar credit through no glaring and persistent fault of their own. Even more Americans have "thin" credit files, meaning that there's not enough information to generate a FICO score. Without that magic key, they can't get approved for credit to do things like buy cars and houses. This is especially common for recent immigrants, young people just starting out in the adult world, or people who have been very debt-averse.
It doesn't mean these people are bad money managers. On the contrary, someone with a bad credit history could manage their money better than someone with a good one. And if they are able to manage their money well and pay off their debts, then they should be granted equal access to credit regardless of whether they have no credit history or have had some scuffles in the past.
That's why FICO is partnering up with the credit bureau Experian and the fintech company Finicity to create a brand-new product just for these people.
Introducing the New UltraFICO Score
The biggest thing that's different with the new FICO score is that it also uses data from your actual bank account to generate a credit score for you. It does this by linking up your bank accounts (checking, savings, and money market, if you have one) with FICO. You choose which bank accounts to include or exclude, so you're in control of the data. You can even opt out of the process entirely if you want.
The idea is simple: manage your money well, and you're more likely to repay your debts — even if you have a low (or no) credit score. This new score takes that into account.
So far all signs are pointing to the new credit scoring system being a great success, says David Shellenberger, FICO's Vice President of Scores and Predictive Analytics. "We estimate about seven million people could see a score increase using the UltraFICO Score driven by a healthy balance of $400 or more a month and not having a negative balance in their checking/savings account in the past 3 months. Close to four million people that meet these same criteria would see an increase of 20 points or more."
Of course, the reverse is also true. If you don't manage your bank accounts well and frequently overdraw them and/or keep low balances in them, your new score may be lower than a regular score.
2019 And Beyond: Rolling Out the New Scoring System
Although the new score shows a lot of promise, it's unlikely you'll be seeing it anytime in the near future. According to Shellenberger, the new scoring system will be rolled out gradually through a pilot phase during summer 2019.
During this time, the new score will only be made available to a small group of 3-5 lenders who'll use it as a backup. These mystery lenders are mostly in the unsecured credit space, meaning that they'll be giving out things like personal loans and credit cards. If someone applies for credit with these lenders and doesn't meet the lender's cutoff, the lenders will instead invite them to apply with a new FICO score that they can generate. From there, lenders will use the new FICO score when they make a decision about whether to give out the loan or not.
This sounds like a lot of ruckus for a small pilot project, but you do have to remember that FICO is the backbone of the entire lending industry and things can't be changed overnight. But Shellenberger is optimistic and believes that once the new scoring system is proven in the pilot project, it'll soon become much more widespread.
Going forward, the new score will become available for lenders giving out secured loans like mortgages and car loans. Shellenberger thinks that the score will be adopted quickly after that, especially by more innovative lenders. Soon, people may even be able to proactively create their new scores rather than waiting for a rejection from a lender like during the pilot project.
"In many ways, this new scoring process is similar to the credit application process decades ago," says Shellenberger. "However, as opposed to pulling together paper files of bank statements to hand to a loan officer, technology today can compile these records digitally. The process is fast, efficient, safe and a vast improvement over the manual processes of the past."