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Fair Isaac, the company behind the widely used FICO score, made major changes to its scoring model last year. In 2014, FICO made changes that reduced the impact of medical collections and paid collections accounts for consumers. Those changes already helped some consumers with poor or bad credit.
These new changes will help score some consumers previously considered high risk by FICO because they had no prior credit reporting history.
You potentially may benefit when dealing with credit card companies, landlords, insurance companies, utilities, and wireless phone providers. The goal is to make it easier to obtain credit, or get lower rates or pay smaller deposits with some service providers. And it may help you develop a credit profile necessary to get additional types of loans down the road.
Do You Know Your Credit Score?
FICO Score Update for 2015 Will Consider Utilities
Traditionally, people with credit reports or credit scores have been characterized as “high-risk” consumers. FICO’s new formula will help those consumers access credit by using their payment history on utilities and cable bills, and how often the consumer moves, to create a score.
FICO reports that this new scoring method may help improve lending opportunities for up to 53 million people who have no credit score and those with a low score due to bankruptcy, foreclosure or other event. As with a regular FICO score, the new system will generate scores between 300 and 850.
Some Consumers May Have Already Benefited
Twelve credit card companies have been working with FICO for months to test how the new scoring model performs in real-life lending decisions. FICO says early testing has given "very positive" results.
The new scoring model does not have a name yet. But it is expected to be available nationwide by the end of 2015.
The scoring model has been in the works for about two years. It comes as a response to lender demand for a scoring method that improves credit availability for more consumers. Lenders have been searching for ways to extend more credit to previously un-scored people to improve loan originations and revenue without increasing risk.
This alternative FICO score may just be a change that benefits both lenders and consumers.
Who Will It Help?
FICO estimates that 53 million Americans without credit reports or credit scores can benefit from the new scoring method and get access to credit.
Editor's note: Other sources suggest the numbers of Americans benefitted by this change may be slightly lower (45 million). But that still amounts to 17% of the adult population.
Most of those with no reporting history or thin files cannot get credit cards or loans, and have difficulty obtaining housing, utilities and cell phone service, because most lending and credit decisions today are based on information on a credit report.
According to FICO, the new alternative credit score will only help people who were previously "unscorable." These people will have easier access to the credit system to get a mortgage or car loan, and have an easier time finding housing, insurance and utility services.
"The goal is to identify would-be borrowers who meet our standards, but they meet it by meeting the standards with different data than we've traditionally used," said FICO CEO William Lansing. "Our goal is to extend credit to as many people as we can responsibly."
Consumers who get the new FICO score and receive a credit card can then receive a regular FICO score, if they manage their credit account responsibly for at least 6 months. This makes it easier to get approved for other types of loans. So the new score may open up additional areas of credit for the previously un-scorable.
What Does this Alternative Credit Score Consider?
A traditional FICO score is based on information on a consumer's credit report. The new score will consider data that is not reported to credit bureaus and typically not used by FICO in its credit scoring models.
The new considered information includes:
- Cable bill history
- Cellphone payment history
- Gas and electric bill history
- Change of address frequency
The information will come from an Equifax database of utility and telecommunication providers and a LexisNexis database.
The score will take into account the consumer's payment history, as well as how often the consumer changes address. This is because frequent address changes are an indicator of instability, including difficulty paying rent.
There is still information we do not know about the new FICO score.
While several credit card issuers have been using it since November, we don't know how many creditors will begin using the new score once it's widely available. It's also unclear how consumers can get access to the new data that is collected on them and exercise their right to dispute mistakes.
The biggest remaining questions are:
- How will utility companies report the information that is used?; and
- Will the new model affect people who already have a FICO score?
We are still waiting for answers to these questions and more information about the alternative FICO score. The CreditShout team promises to monitor the situation and update as new information become available.
One thing, however, is clear:
The new scoring model has the potential to help millions of people who currently lack a credit score and have trouble with everything from renting an apartment to getting affordable car insurance.