In order to build your credit, the current credit scoring system requires you to take on some sort of debt before you rate as a creditworthy individual. The system takes your debt repayment history into account, but overlooks important money management skills such as keeping a healthy bank balance and never overdrawing on your accounts. It’s not the worst system, but it does leave room for improvement.
This creates a sort of “chicken and egg” situation because for you to get a credit score you need to take on debt, but no one will give you any loans if you do not have a credit score, good or otherwise. However, with the new UltraFICO credit score, things are poised to change.
The New UltraFICO Credit Score
FICO, the company that is responsible for generating credit scores for all Americans, announced through a press release that it is partnering with Experian (one of the leading credit rating bureaus) and Finicity (a financial technology company) to create the UltraFICO.
With this new model, Finicity will be able to (with your permission of course) aggregate your personal banking information. FICO then takes that information in conjunction with your data from the credit rating bureau, Experian, into account to generate a new credit score based on both your payment history as well as your banking data and discipline.
The information collected from your banking data will include things like:
- Your savings information
- Money markets accounts
- How long the accounts have been open
- The activity level on the accounts
This is in an attempt to create a more holistic picture of your financial health and behavior to determine your capability to pay back loans. As things stand now, the UltraFICO program launches in early 2019 as a pilot program to see just how willing Americans are to share sensitive banking information.
Who Will Benefit from the New UltaFICO Score?
The proposed UltraFICO score is very much a second-chance score that benefits two main groups of people:
- Those with no credit history or very thin credit histories
- Those trying to rebuild their credit scores after falling upon tough financial times
It is primarily built to benefit people practicing good saving and banking habits. For example, people with no credit history because they have not needed to borrow any money due to their excellent money and lifestyle management skills.
As per the new systems, consumers maintaining a healthy savings balance (at least $400) and those keeping a positive balance in their deposit accounts get to see an improved credit score based on that information. People new to the credit world (have no credit history but have a healthy banking habit) get to see a 20+ points increase on their score.
Additionally, people with bad financial luck and those with accounts going into collections but had excellent banking habits until that point will see an increase of 20+ points on their score.
Furthermore, this new UltraFICO score also benefits those who:
- Are just below a cutoff point for credit approval
- The lender only uses Experian as they are the only distributors at the moment
Even though credit scores have been rising in general lately, this new scoring system is bound to make life a little bit easier for people being left out due to technicalities.
Is the New UltraFICO Credit Score a Double-Edged Sword?
Of course, with every new way of doing things comes a bit of concern as to what else that new method will impact in the long run. As things stand now, the new UltraFICO credit scoring system is set to open credit avenues for the previously disadvantaged individuals who had very thin or no credit scores in the past.
However, some concerns taking banking information into consideration could hurt those who otherwise have a good borrowing and paying history but have poor banking habits.
These are some of the main concerns:
- It could ruin the credit score for others: while it could make it easier for people with thin credit histories but good banking habits to get good credit scores, it could very well do the opposite for those who have a good credit history but poor banking discipline.
- It could open up lending avenues for people who are a credit risk: the country is still reeling from the meltdown caused by subprime loans in 2008. One of the main reasons why that happened is because of credit avenues where open to people who could not afford to pay them back thus putting a strain on the lending companies.
There are concerns that this new scoring system may open up loopholes that may allow less deserving or people that would otherwise be considered a high credit risk to access loans that they may not be able to repay thus creating a whole new cycle of financial disasters.
- It could create a new identity theft risk: there is no doubt that big organizations that hold very sensitive information can face hacking attempts. Now imagine if hackers got hold of all your banking information from the Finicity servers as well as your credit information from Experian? It sounds far-fetched, but this is something that could happen and create a whole slew of identity theft problems for the American people.
Creating a new credit scoring system is a noble idea, and it will undoubtedly open up lending avenues for people who were otherwise disenfranchised by the current scoring system. However, this is something that must be approached with extreme caution as it involves the use of highly sensitive personal banking information and the opening up of the lending industry to previously unknown and unscored players. Its effects on the overall economy remain to be seen.
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