November 2nd, 2018 5:47 PM by Jackie A. Graves, President
For millions of Americans, it might soon be
easier to get a mortgage loan — or any type of loan, for that matter —
especially if they fall in the 500 to 600 FICO score range or have little to no
credit history at all.
The change comes by way
of the UltraFICO — a new type of credit scoring system that aims to help
consumers establish credit based on banking and savings activity, rather than
credit cards, loans and other debts.
Freddie Huynh, vice president of credit risk at Freedom
Financial Network, called UltraFICO “a great development for consumers.”
“When it comes to credit scoring, new data, as long as it is
accurate data, is good for consumers,” Huynh said.
The new score
is said to most benefit the 7 million consumers who fall into the upper 500 to
low 600 FICO score range — usually just under a lender’s minimum credit
threshold. It should also help the 15 million Americans who have no credit
score at all (due to never taking out a loan, applying for a credit card, etc.)
It also gives consumers more control of their financial options,
according to Steve Smith, CEO at Finicity — which is helping to launch the new
“While this data will not substitute for the traditional credit
score, it empowers consumers to contribute their positive data to help boost
their current scores and achieve the right loans with more competitive terms
than before,” Smith said. “The UltraFICO score is revolutionary because, for
the first time ever, consumers will play a direct role in determining their own
How Does it Work?
While the traditional
FICO score considers things like length of accounts, total credit balances and
repayment history — all items based in previous debts or loans — the UltraFICO
instead focuses on signs of “positive financial behavior.” It takes into
account things like evidence of consistent savings, keeping healthy banks
balances, avoiding negative balances and regularly paying bills on time.
According to Smith, the UltraFICO provides deeper insights into
how likely someone is to repay.
“Traditional credit scores are determined based on a few
different factors, mainly credit card and loan repayment history,” Smith said.
“They are effective enough in many cases but leave off consumers who have not
been able to establish a sufficient credit history — an issue that many young
people and minorities deal with. However, with new advancements in technology
and data analysis, we’re finding that there are other indicators of a person’s
likelihood and willingness to repay a loan.”
But the UltraFICO and basic FICO scores aren’t completely
disparate. According to FICO, the UltraFICO can actually improve a person’s
basic score, too. During testing phases of the new scoring system, seven out of
10 consumers who saved $400 and had no negative balances for the past three
months saw their basic FICO score jump after opting into the system. Four out
of 10 had their scores jump 20 points or more.
Ultimately, the UltraFICO score will be optional — and it won’t
be offered to everyone. Consumers can opt in and will be given the choice to do
so when they can’t be qualified by more traditional scoring systems. Opting in
will allow the lender to access their banking and savings data and evaluate
their overall financial responsibility.
“The best way to improve credit scores powered by credit bureau
information is to source new data sources,” Huynh said. “Leveraging the banking
information volunteered by consumers is a logical and effective way to improve
credit scores. One of the reasons why I am bullish on this development is that
real improvement can only be realized by data that is orthogonal — that is, it
captures new information that isn’t found in traditional sources like credit
Should Opt In?
The sweet spot for UltraFICO
is consumers in the 500 to 600 traditional FICO range and those who don’t have
any credit score at all. Consumers with good to great credit? It’s not going to
have much of an impact, according to Matt Schulz, chief industry analyst at
“UltraFICO will be most helpful to those new to
credit and to those right on the edge of qualifying for a loan,” Schulz said.
“If you have a 750 credit score, you probably won’t need to bother with this.
However, if you have a 695 score and just barely miss out on getting a loan,
UltraFICO can, in theory, give you a second chance. You’re basically providing
your lender a few extra data points to try to convince them that you’re worthy
of receiving that loan.”
Millennials, many of whom haven’t had much opportunity to build
credit, could see particular benefit from the new score, according to Smith.
“Often, their parents paid for their schooling and cars, and
they don’t apply for credit cards until they reach adulthood,” Smith said.
“This is often the same time they transition to taking out their own loans but
find themselves ineligible due to a lack of previously established credit. In
this situation, being able to show that they have their own savings accounts,
regularly pay their rent and manage their checking account well could be the
difference in enabling them to obtain a mortgage.”
But if those Millennials are freelancers, gig workers and anyone
with inconsistent cash flow? They might want to think again. According to
Tendayi Kapfidze, the new system could actually be “detrimental” to these
“Gig workers can have a traditional credit file just like anyone
else,” Kapfidze said. “They could be at a disadvantage under this system due to
their irregular cash flows.”
Schulz said that under the UltraFICO system, these inconsistent
balances could cause lenders to see them as a bigger risk, ultimately hurting
their chances at getting a loan.
The UltraFICO score will be tested by a select handful of
lenders in early 2019 and will open up for wider use by summer.
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