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.
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:
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.
The proposed UltraFICO score is very much a second-chance score that benefits two main groups of people:
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:
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.
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:
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.
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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