While this new alternative “credit” algorithm is not set to roll out until sometime in 2019, included below are my initial thoughts based on the BIAA press release and the below referenced articles from the Wall Street Journal, Consumer Affairs and USA Today.
With Ultra FICO® Score, a consumer grants permission to contribute information from banking statements, including the length of time accounts have been open, frequency of activity, and evidence of saving, which can be electronically read by Finicity and combined with consumer credit information from Experian to provide an enhanced view of positive financial behavior.
Experian, FICO and Finicity estimate this new score has the potential to improve credit access for the majority of Americans and is particularly relevant for those who fall in the grey area in terms of credit scores (scores in the upper 500s to lower 600s) or fall just below a lender’s score cut-off. Consumers who are relatively new to credit with limited history or those with previous financial distress that are getting back on their feet stand to benefit the most.
This new system will roll out next year. Initially, the most likely use will be for beginner credit cards. The UltraFICO® is an add-on feature some lenders will offer to enhance a prospective borrowers credit profile and score.
The prospect must provide access for a one-time snapshot of their banking/bill paying account. The data analyzed will be regular payments of rent and utilities. The expected average balance in the account should be $400 or more. There should be no overdrafts or NSF checks in recent months. It’s expected there will be more income than outgo to the account. Discussed is that the checking/bill paying account must be established for some undefined time.
The above referenced WSJ article captures the essence of what the new credit score enhancing tool is expected to be. It will not, in the immediate future, be used by mortgage lenders. I expect that it may be used by some auto dealers.
According to the Journal report, the new UltraFICO® would be a tool for consumers whose credit scores are not that great. If they have a few hundred dollars in the bank and have had the bank account for a number of [undisclosed] years without overdrawing they might see their credit standing rise.
But in practice, the new formula is likely to be of greater benefit to consumers who already have high credit scores because they are the consumers most likely to have accumulated some cash in the bank. Consumers with low credit scores are often in that situation because they lack the extra cash to meet an unexpected expense.
Based on practicality and experience, I believe this Consumer Affairs writer is off-base in his analysis of who this will help the most. Someone with >760 FICO® Scores has no need for a bump of a few points whereas someone with a 620 score most definitely has the need. We’ll soon figure out just how many months one must have $400 or more in their account to gain the bump.
Finally, from the above referenced article from USA Today: “...it remains to be seen how fast lenders will adopt this supplemental scoring system. For instance, FICO’s latest credit score – FICO 9 – was released four years ago, but the previous version of the score – FICO 8 – remains the most widely one used.”
Consider the fact that neither FICO 8 or 9 are used in the mortgage lending industry. UltraFICO® may be used by certain credit card issuers as well as some vehicle lenders. We’ll know more next year.