New op­tion de­signed to help peo­ple with lower credit scores

The Columbus Dispatch - - Front Page - By Ann Car­rns

Con­sumers with lessthan-stel­lar or border­line credit scores may soon have a new op­tion to help them qual­ify for loans and credit cards.

Fair Isaac Cor­po­ra­tion, cre­ator of the widely used FICO credit score, said it would test a new score that con­sid­ers a bor­rower’s bank ac­count bal­ances and cash man­age­ment be­hav­ior as a sup­ple­ment to a tra­di­tional credit score.

The new score, Ul­traFico, will be tested early next year with Ex­pe­rian, one of the three big credit re­port­ing bureaus, and of­fered as an op­tion to con­sumers whose tra­di­tional credit score alone would not qual­ify them for a loan.

Peo­ple who al­ready have strong credit scores shouldn’t need to con­sider Ul­traFico. “It would most likely be used as a sec­ond chance,” said Sally Tay­lor-Shoff, scores vice pres­i­dent at FICO.

Credit scores are three­digit num­bers that lenders use to eval­u­ate a bor­rower’s abil­ity to re­pay a loan. The higher the score, the less risk the lender faces. Ba­sic FICO scores range from 300 to 850, with 700 and above con­sid­ered good. The av­er­age FICO score has been ris­ing in re­cent years and stands at 704.

Tra­di­tional credit scores are based mainly on a bor­rower’s his­tory of re­pay­ing mort­gages, loans and credit card bal­ances. Lenders and card com­pa­nies re­port pay­ments to the big credit bureaus — Ex­pe­rian, Equifax and Tran­sUnion. The bureaus then use for­mu­las from FICO, or other mod­els, to dis­till a con­sumer’s credit file into a score.

The new op­tion, FICO said, will be most help­ful for cus­tomers who have scores from the up­per 500s to the low 600s — some­times called “sub­prime” — or fall just be­low a lender’s score cut­off for a given loan. Peo­ple who will ben­e­fit the most are those new to credit — say, young peo­ple with a lim­ited credit his­tory — or those who hit a fi­nan­cial pot­hole and are re­build­ing their credit.

Lenders must ob­tain a bor­rower’s per­mis­sion to col­lect in­for­ma­tion about their cash man­age­ment habits and cre­ate an Ul­traFico score, Tay­lor-Shoff said.

Ap­pli­cants with at least a $400 av­er­age bank ac­count bal­ance, and no his­tory of neg­a­tive bal­ances, are most likely to ben­e­fit. The new score takes into ac­count fac­tors like how long ac­counts have been open, the fre­quency of ac­tiv­ity and ev­i­dence of sav­ing.

FICO and Ex­pe­rian are work­ing with the tech­nol­ogy com­pany Finic­ity to dig­i­tally gather bor­rower bank ac­count in­for­ma­tion.

Com­pa­nies have used such tech­nol­ogy for years to ag­gre­gate bank ac­count data for on­line bud­get­ing tools, like Mint.com, she said. Lenders get a sum­mary of the ap­pli­cant’s bank ac­count pro­file, Tay­lor-Shoff said. De­tails like whom you write checks to aren’t shared.

One rea­son for a pi­lot is to gauge the “will­ing­ness of con­sumers to share fi­nan­cial data” in ex­change for a higher score, FICO said.

Some fi­nan­cial com­pa­nies are al­ready us­ing un­der­writ­ing sys­tems that fac­tor in de­posit ac­count in­for­ma­tion. A startup called Pe­tal, for in­stance, sup­ple­ments tra­di­tional credit scores with an anal­y­sis of a po­ten­tial cus­tomer’s bank ac­count when eval­u­at­ing credit card ap­pli­ca­tions.

Chi Chi Wu, a lawyer with the Na­tional Con­sumer Law Cen­ter, said bank ac­count trans­ac­tion data “def­i­nitely has a lot of prom­ise” as an al­ter­na­tive scor­ing method, so long as con­sumers have true con­trol over whether to share in­for­ma­tion and what level of de­tail is shared.

“Right now,” she said, “it looks like this prod­uct does not use mer­chant iden­tity in­for­ma­tion and there is real con­trol.”

Kather­ine Lucas McKay, a pro­gram man­ager with the Aspen In­sti­tute who is fo­cus­ing on con­sumer debt, raised the is­sue of how the new scor­ing model will in­ter­pret the added bank ac­count data.

“Peo­ple man­age their money in all sorts of weird ways,” she said. “We’re not sure what the as­sump­tions will be.”

It’s not clear if the other two credit bureaus will even­tu­ally of­fer Ul­traFICO along with Ex­pe­rian. Tran­sUnion said in an emailed state­ment that it “ap­plauds all ef­forts that pro­mote fi­nan­cial in­clu­sion and ex­pand eco­nomic op­por­tu­nity.” Equifax didn’t re­spond to a re­quest for com­ment.

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