A New Credit Score for Risky Consumers
Securing a loan may soon get much easier for people with bad credit, said AnnaMaria Andriotis in The Wall Street Journal. Fair Isaac Corp., the company behind the FICO scores that are widely used to gauge consumers’ creditworthiness, is testing a “new metric” that could make as many as 15 million scoreless people more attractive to lenders. People without credit scores—either “by choice or because of a negative credit event, such as a bankruptcy, foreclosure, or a collection account”—are deemed “even riskier than so-called subprime borrowers” and are often completely shut out from “mainstream borrowing” products like mortgages, car loans, and credit cards. Though the new score won’t replace traditional FICO scores, it will give lenders another “yardstick” for assessing applicants, focusing on whether consumers have regularly paid their “cable, cell phone, electric, and gas bills, as well as how often they change their address and other factors.”
This is certainly a reversal from “the great credit tightening that followed the 2008 crisis,” said Nick Clements in Forbes.com. But now that banks are once again “looking to expand their lending activities,” this new score may help them identify creditworthy customers who don’t fit the usual mold. But it’s not a perfect fix. “Consumers will have to keep an eye” on the accuracy of their information in a database called the National Consumer Telecom & Utilities Exchange, or NCTUE, which collects and reports utility bill data. If your utility company doesn’t provide data to NCTUE, “you will still be out of luck.”
These scores might actually do more harm than good, said Ashlee Kieler in Consumerist .com. “While providing more credit options for people is a good thing,” some advocates worry that judging creditworthiness on factors like utility payments is the wrong way to go. Even a few isolated late payments—say a harsh winter causes your heating bills to spike beyond your means—could become black marks on consumers’ credit and hurt them “when they are applying for jobs or looking to buy home or auto insurance.”
The real question is whether these scores will catch on, said Penny Crosman and Andy Peters in AmericanBanker.com. “Banks have contemplated the use of alternative data sources for credit decisions for years,” and the three credit bureaus, Experian, Equinox, and TransUnion, have already teamed up to offer VantageScore, a similar product that aims to help lenders evaluate “unscorable” consumers. While FICO’s name carries some weight and at least 10 credit card issuers have signed on for a testing phase, existing competition might make it tough to recruit more lenders.
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