Within the last twenty-four hours, more and more news outlets and bloggers are talking about the announcement by Fair Isaac Company (FICO) that they have developed a new way to calculate credit scores. Even Good Morning America had a segment on it this morning (video embedded in the link)! The buzz is because this new method of calculating the score may help millions of people obtain credit who, based on the existing methodology, would not be able to get credit, or would certainly have to pay much higher interest rates if they were to borrow.

According to the Marketplace report yesterday (2 minute audio), 53 million Americans have no credit history. This new method of calculating credit scores looks at bank data to determine credit worthiness. It could potentially help 10-15 million people of these people get credit. It might also generate a higher score for people that are recovering from events that hurt their credit score in the past, but who have been responsible with their money since then.

What exactly is it, and how does it work?

Fair Isaac teamed up with Experian and a company call Finicity to create what is effectively an appeal process for people who are initially denied credit. When a person is denied credit based on their current FICO score he/she person will be able to ask Experian to look at their banking history (checking, savings, and money market accounts). You must “opt-in” to this recalculation, and you even tell them which accounts to look at. It is done when requested, but this score is not maintained/updated as the regular FICO score is.

This is where Finicity comes in—they obtain and analyze the bank data for Experian, and send them a summary. (No actual transactional data is shared with Experian, ensuring some privacy and security.) If you keep a balance of at least $400, pay bills on time and don’t overdraw your account, your score could go up by as much as 20 points.

Who will see this information? Where is it stored?

Experian will distribute both the new score and the summarized bank data to the other credit-reporting companies.

Experian will keep the potentially valuable cache of sought-after account information. The company said it would use the data to address consumer disputes about accuracy. FICO won’t have access to personalized account information. (WSJ)

Given recent data breaches, you will have to judge for yourself how comfortable you are with this arrangement. The agencies already have most of your information anyway, and you can control which accounts you want them to consider, if that reassures you.

Will lenders actually use it?

The Ultra FICO score should be widely available sometime in 2019. Historically, lenders have been slow to switch to new versions of the FICO score. Most lenders still use FICO 8, which was released in 2009 and removes medical debt and debt that went to collections but has been settled. FICO 9, which was released in 2014 and excludes liens and civil judgments, is not widely used yet.

Who does this really help?

Fifty-eight percent of people now have a credit score over 700. The average credit score has reached an all time high of 704 from 686 in the depths of the recession a decade ago. There is some debate as to whether people with sub-prime credit scores (under 670) should be given more access to credit. But in times of low unemployment and relatively low default rates, lenders want to see the level of consumer debt continue to increase, and Ultra FICO will broaden their base of potential customers.

Another article in today’s WSJ cited the same reasoning behind the lender's decision to share the algorithms they use to approve loans and credit cards with Credit Karma, so that consumers can determine if they will qualify for credit BEFORE applying (which hurts your credit score as it counts as a hard inquiry).

I personally think it may benefit those starting out in the world of ‘adulting.’ As I know from working with college students, most of them exclusively use debit cards, and are denied credit cards more often than not when they apply. For the rest of the targeted beneficiaries, time will tell. 

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