Three major credit rating agencies are set to give high-risk borrowers a new boost as Experian, FICO and Finicity jointly announced a new system of credit rating on Monday, Oct. 22.
The new system, known as UltraFICO, would include — with consumer permission — checking, savings and money market account data.
That information could prove especially useful to the 9% of people in the U.S. that have a FICO score below 550. Currently, those with low FICO scores may not only find it more difficult to secure loans, but may also find it hard to pass other litmus tests, such as mortgage applications, top credit card offers or even renters’ applications.
FICO’s news release reported that the new UltraFICO score “has potential to improve credit access … and is particularly relevant for those who fall in the grey area in terms of credit scores” of up to the lower 600s. For these people, the UltraFICO score can boost their odds of receiving approval for loans—as well help them achieve potential savings over the lifetime of said loans.
With UltraFICO set to launch as a pilot program in 2019, consumers are understandably curious about what lies ahead. According to FICO, the pilot program will help evaluate whether credit consumers are willing to share information—such as checking account information—for a chance at a higher credit score.
Previously, having a lot of money in a savings account would not move the needle for a consumer’s credit score. Instead, the chief factors affecting a credit score included payment history, the amount currently owed and length of credit history. This structure typically required those trying to build their FICO scores from the ground up to do so gradually, building with consistent credit payments, keeping various types of credit accounts open and maintaining those accounts over longer periods of time.
Having access to credit is a major issue for consumers. For some, a low credit score may even mean losing confidence in loan and mortgage applications altogether. A Federal Reserve survey found that out of 85,369 mortgage applicants, only 6.8% had credit scores less than 620. This suggests that those with low credit scores may even self-select when it comes to applications for major loans, which hints at a lack of confidence for consumers unable to achieve higher credit scores.
UltraFICO, if successful, would allow consumers to use their everyday monetary behaviors to enhance their credit scores. But what’s key for UltraFICO as it rolls out will be participation. With a rollout planned for 2019, it remains to be seen how consumers will react.
According to FICO.com, seven out of 10 consumers who exhibit responsible financial behavior in their checking and savings accounts could improve their scores with UltraFICO. This adds an entirely new dimension to a consumer’s credit score: simply managing money well—in some cases, without borrowing—could affect their ratings with credit agencies.
For some, this might be perceived as an invasion of privacy. For others—particularly those who need to rebuild credit but have trouble accessing vital loans such as mortgages—it could be an important way to demonstrate financial responsibility. According to FICO.com, people who need this kind of access include a wide range of “underbanked.”
Even those with effective habits when it comes to credit can have trouble demonstrating their ability to manage credit with previous versions of FICO scores. The new version could be a boon to those unconventional money managers who need access to more credit for a business or even a personal home.
In the future, it may turn out that a good credit rating refers to more than one’s ability to handle debt—it may refer to one’s ability to handle all money.
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
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