Blog posted On October 31, 2018
The FICO credit score is the most widely accepted credit score used by banks and lenders to determine a borrower’s ability to repay a loan or line of credit. The FICO credit score is influenced by five factors: payment history (35%), total amount owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). Early next year, FICO plans to adjust their scoring system to include how consumers manage the cash in their checking, savings, and money market accounts, the most significant change to the scoring system since the early 1990s.
The new score, called the UltraFICO Score, is meant to help consumers who have not yet established credit, get approved for credit cards and loans. Since the FICO credit score is largely dependent on a payment history, total amount owed, and length of credit history, consumers who have not yet taken out and repaid loans, especially younger consumers, may not qualify for credit cards or other loans. FICO contend the new scoring method has been in the works for years and will help cautious lenders who are looking for new ways to make credit more accessible.
Currently, consumers can do little to influence their credit score, other than responsibly repay loans and build credit over time. They can also contest errors on their credit reports to the three major credit-reporting bureaus, Experian, Equifax, and TransUnion. The Ultra FICO Score gives consumers more control over their credit report. For example, a consumer who intends to apply for a loan can improve their likelihood of approval be maintaining steady account balances while completing transactions frequently and avoiding overdrafting. Applicants will also get to choose what accounts they would like to be considered in their score.
Following the Recession, banks and lenders have exerted extreme caution when issuing loans and lines of credit, limited to transacting with the most creditworthy borrowers. Because of these limitations, a large share of the market has been left out. Today, 58.2% of consumers with FICO credit scores have a score that exceeds 700 and the average FICO score sits at a record 704. Even with credit scores at record highs, some banks and lenders still have restrictive minimum scores.
According to FICO, about seven million loan applicants with low credit scores, have low scores because of their limited credit history. FICO predicts, consumers with an average bank account balance of at least $400 who have not overdrawn the account in three months or more will likely see their scores increase. David Shellenberger, FICOs senior director of scoring and predictive analytics, asserted, “FICO is very focused on its ability to separate future good borrowers from bad borrowers. Some scores could decrease when the new information is taken into account”
In addition to the upcoming UltraFICO Score, additional changes to credit-reporting and credit-scoring has helped consumers. Equifax, Experian, and TransUnion all began deleting tax-lien and civil-judgement information from credit reports and removing certain accounts in collections. Eight million consumers were impacted by the move, and experienced an average score increase of 14 points each.
Sources: The Wall Street Journal