Scoring system for risky buyers
A new plan aims to help the millions of Americans who have no access to credit.
People struggling with a bad credit score, or lack of one, could benefit from a program rolling out in the next few months aimed at making it easier to get a Visa or MasterCard.
The company behind the widely used FICO credit score has announced a pilot program to help millions of Americans get easier access to credit, based on their record of paying utility bills, instead of their history of loan repayments.
The potential reach of the program is huge. An estimated 53 million Americans, or a quarter of the U.S. adult population, don’t have FICO scores created by the company Fair Isaac. Roughly 90% of all lending decisions — credit card applications and auto loans, among others — are based on that score. Banks would normally deny credit to anyone without one, or they could charge them significantly higher interest rates, because the applicants would be considered risky. Scores range from 300 — poor — to 850 — perfect — and are determined by a borrower’s credit payment history, outstanding balances and length of credit history.
These consumers are often the young, without an established credit history, or immigrants, who are new to the U.S. A disproportionate number of these “unscoreable” people are minorities as well, particularly black and Latino consumers, says Ankush Tewari, senior director of market planning at LexisNexis Risk Solutions. Lexis Nexus is one three companies involved in the program.
The program took two years to develop and came from Fair Isaac. Research showed people who have a history of paying utility bills on time would also pay credit card bills on time.
Under the program, Fair Isaac, working with LexisNexis and credit agency Equifax, will create a payment history profile from a person’s utility bills and public property records. FICO would use that pooled data determine an “alternative” credit score when a person with a poor credit history, or none at all, applies for a credit card.
The scores are being made available to the 12 largest credit card issuers, but Fair Isaac did not say which banks will be participating in the program.
A spokesman from JPMorgan Chase, the nation’s largest credit card issuer by number of cards, declined to comment. Representatives from American Express and Citigroup did not respond to requests for comment.
The program, which does not have a name yet, is not designed to replace the traditional FICO score and will only be available to credit card issuers initially.
Once a person obtains a card using this alternative score, they would be able to establish a credit payment history. They could then apply for auto or home loans.
“Most people have a cellphone, gas or electric bill, and the size of those payments each month can be sizable,” says Jason Flemish, vice president of consumer risk and credit products at Equifax. “So let’s give them the opportunity to benefit from paying those bills on time.”
Banks have a financial interest in the program. The millions of Americans without a FICO score are potential borrowers who could get credit cards.
Because these borrowers would have limited credit history, banks could charge high interest rates.
The data being gathered by Equifax and LexisNexis is also covered under the Fair Credit Reporting Act, says Tewari of LexisNexis. People will be able to dispute any negative event, like a contested utility bill payment, in their credit report.