By Selina Stoller, Summit Consumer Receivables Acquisitions, LLC
In early 2019, Fair Isaac Corp, creator of the widely used FICO credit score, will be rolling out the UltraFICO credit score. Credit scores for decades have been mostly based on borrowers’ payment history. Moving forward, the new scoring system also monitors how people manage their savings, checking, and money-market accounts.
This is one of the biggest shifts for the credit reporting and FICO scoring system which is the staple for the majority of consumer-lending decisions in the U.S. since the 1990s. Even a decade after subprime-mortgages brought down the U.S. financial system; consumer lenders remain cautious of borrowers with low credit scores.
But lenders have been leaning on credit-reporting firms and FICO to figure out a way to boost lending without taking on significantly more risk.
The UltraFICO score is likely to boost many applicants with less-than-ideal records. This will also help lenders expand loan volume by boosting loan approvals after years of cautious lending. If an applicant’s traditional FICO score falls short, a lender will be able to offer a re-calculated score to reflect banking activity.
Potential borrowers with at least several hundred dollars in long-term accounts and make frequent transactions without overdrawing are likely to see their scores rise. For example, consumers with an average balance of at least $400 who haven’t overdrawn in the prior three months would likely get a boost, according to FICO.
FICO says about seven million lending applicants – who have low credit scores due to thin borrowing histories – are likely to see their scores improve under the new system. Some 26 million subprime borrowers will also end up with higher credit scores.
Overall, the new UltraFICO system is designed to boost the number of approvals for credit cards, personal loans, and other debt by looking at a borrower’s history of cash transactions which could indicate how likely they are to repay.
- 1 Nov, 2018
- Josh Smith