Bright borrowers know that a higher credit score, an indication of creditworthiness, can help them qualify for more preferred loans and lower interest rates.
Now, Fair Isaac Corp. (FICO), the company responsible for creating your FICO score, the credit score most valued and used by lenders, is offering a new scoring program. FICO XD factors in alternative forms of data in order to qualify more consumers for credit.
Used by 9 out of 10 lenders, FICO gathers data from traditional credit bureaus like the big three consumer reporting agencies – Experian, TransUnion and Equifax – and assigns a score between 300 and 850.
However, some 26 million consumers are “credit invisible,” meaning they have no credit records, according to the Consumer Finance Protection Bureau. An additional 19 million had credit records that have been treated as unscorable.
FICO XD, introduced last year, uses non-conventional data, such as property data and telecom payment histories, to fill in the gaps for consumers who may have insufficient credit histories to generate a traditional FICO score. The result? An estimated 15 million formerly unscorable borrowers can now be scored via alternative data.
“We’ve found that over one-third of these newly scored consumers now have scores over 620, which is a common threshold for lenders,” says Joanne Gaskin, senior director of scores and analytics for FICO.
The pilot program is geared toward fast-tracking credit card approvals and not mortgages. But armed with the new score, Americans who obtain a credit card and properly manage their payments for a minimum of six months will get regular FICO scores, easing their path toward getting approved for a mortgage loan down the road.
Robert Harrow, research analyst with ValuePenguin, a personal finance website, says it’s too early to know what effect FICO XD might have on the mortgage market.
“While FICO may be presenting lenders with a new scoring model, we’ve yet to see it be applied,” says Harrow. Big banks may be slow to adapt the new model because they have their own legacy assessment systems in place, he said.
FICO XD is not the only alternative credit rating product. VantageScore (backed by Experian, Equifax and Transunion), Experian’s Extended View Score, PRBC credit score and others compete with FICO.
In addition, the nation’s largest mortgage loan holders, FHA, Fannie Mae and Freddie Mac, all allow mortgage approvals for non-traditional credit reports, “although each has separate criteria,” notes Kevin Haney, president of A.S.K. Benefit Solutions, an insurance provider in East Brunswick, N.J.
How, and even if, credit scores are calculated for lending decisions is under scrutiny by legislators. If passed, the Credit Score Competiton Act of 2015 (HR 4211) now before Congress would enable Freddie Mac and Fannie Mae to update their requirements so that lenders could consider alternative credit scoring models rather than relying solely on FICO.
Meanwhile, to improve your traditional FICO score, manage your credit wisely:
– Pay all bills on time
– Keep balances on credit cards and other revolving credit low
– Open new credit accounts only as needed
– Pay off debt; don’t just move it around
– Don’t close unused cards as a short-term strategy to boost your credit score
– Be patient. Negative information on your credit report, such as late payments, a bankruptcy or too many applications for new credit, all take time to go away.