How good is your credit? Do you know your FICO score? How do you measure up when it comes to paying your bills and managing your debt?
For the last two decades, the three major credit reporting companies—Experian, TransUnion and Equifax—have relied heavily on a scoring system created by the Fair Isaac Corporation—FICO—when reporting consumer creditworthiness. Payment information is reported to those agencies from lenders, creditors, collection agencies and others. The same information may not be reported to all three agencies, and this can at times lead to difficulties for consumers who have little to no control over what gets reported on their credit other than how they make their payments.
The Wall Street Journal reports that could soon change with the new UltraFICO that is touted as a new way to score consumers based on how they handle cash transactions and their bank accounts.
Set to roll out in early 2019, the UltraFICO is “latest answer to lenders who after years of mostly cautious lending are seeking ways to boost loan approvals.”
With the new system, a customer who is turned down for credit via the regular FICO route can have their applications re-evaluated through the UltraFICO system—which places a heavier weight on the balance in their banking accounts, the number of debit card transactions they make and whether or not they overdraft their accounts.
Applicants who go the UltraFICO route will have the option to choose which accounts they want to be evaluated in that process, but the accounts need to have been open for a while and have several hundred dollars in them. Those with an average account balance of $400 who have not had an overdraft in the previous three months would likely see a boost to their scores.
FICO estimates that about seven million borrowers who don’t have extensive credit histories could see a boost to their scores under the new system. For those with subprime credit histories, 26 million could end up with higher scores under the new system with four million of those people seeing a jump of 20 points or more in their score.
David Shellenberger, FICO’s senior director of scoring and predictive analytics, told WSJ that the new score is designed to prevent risky borrowers from appearing more creditworthy than they are, by reflecting positive financial behavior that was previously invisible.
Shellenberger said FICO is “very focused” on its “ability to separate future good borrowers from bad borrowers.”
He added that there is a chance, however, that some scores could decrease under the new system.
A question that needs to be asked is how will this new system affect blacks and people with lower incomes?
Black people in the United States are historically unbanked or underbanked. According to the FDIC, at least a quarter of American households are unbanked or underbanked. Nearly half of black households fall under that category. They don’t have checking, savings or money market accounts. Most live paycheck to paycheck and even the most nominal fee is an impediment to holding an active bank account.
So how will they fare under the new FICO system? How does the new system help them, if at all? What measures are being put in place to engage them in the banking and borrowing system?
At this time, it doesn’t seem like they are even a consideration, but they should be.
And for those black and low-income households that do have a checking account, what is the likelihood that they have been able to go three months without overdrafting—even if that overdraft was immediately taken care of after the fact?
I can use myself as an example. I have a bank account with one of the bigger national banks. I make a good salary, I have direct deposit, and I have overdraft coverage which means the bank covers my purchases even if the funds are not available in my account. I follow up with transferring money from another account to cover it when that happens, but technically it is still an overdraft. How does that impact my credit under the new system? I am not what you would consider low income, but if we count that overdraft coverage (not to be confused with overdraft protection) then I technically overdraft at least once a month.
I suppose I am one of those people for whom my score would be dragged down by this.
While it sounds good in theory, the new FICO system seems like another barrier against people who are not made of money.