By AnnaMaria Andriotis
Fair Isaac Corp., the creator of the most widely used consumer
credit scores, announced Thursday a new score intended to make
millions of people who have had difficulty getting approved for
financing creditworthy.
The Wall Street Journal reported the creation of the new score,
currently in a pilot phase, on Wednesday.
The pilot program from Fair Isaac, also known as FICO, allows 12
of the largest U.S. credit-card issuers to identify consumers who
would otherwise have difficulty getting approved for credit, though
FICO didn't name the issuers.
FICO said the score complies with regulations that will allow
lenders to "extend credit responsibly." The firm plans to complete
the pilot program and make the score available to more lenders this
year.
The announcement was made in conjunction with credit-reporting
firm Equifax Inc. and LexisNexis Risk Solutions, which provides
risk-related data to lenders. Both firms are providing alternative
data for the new score, including payment history on utility bills,
cable bills and cellphone bills--information held in a database
maintained by Equifax--as well as public record information,
including address history, held in the LexisNexis database.
Some 15 million previously unscorable consumers can now be
scored based on the alternative data, FICO said. In total, some 53
million people in the U.S. don't have FICO credit scores, according
to FICO, most of whom either don't use debt by choice or because a
negative credit event, such as bankruptcy, foreclosure or a
collection, has shut them out of mainstream borrowing. Traditional
FICO scores are used in 90% of consumer-lending decisions,
according to CEB TowerGroup, a financial-services research
firm.
With the new score, consumers who receive a credit card and
handle their payments well--avoiding falling behind on payments and
maintaining low balances--for at least six months will then receive
regular FICO scores, which will make it easier for them to get
approved for other loans, including car loans and mortgages.
There is evidence the new score will help to give more people
access to many forms of credit. Some one-third of the 15 million
individuals who have a score under the new system have a score that
is above 620, FICO said. The new FICO score, like the traditional
ones, ranges from 300 to 850. Credit-card issuers, car-loan lenders
and more mortgage lenders often approve applicants with traditional
FICO scores above 620. The percentage of individuals getting scores
above 620 on the new gauge "is a good indication that this is a
process to onboard more consumers and allow them to maintain more
creditworthiness," said Jim Wehmann, executive vice president of
scores at FICO.
The new score, which FICO says it has been working on for the
better part of two years, comes in response to lender demand for a
score that will make more people creditworthy. Lenders have been
increasingly looking for ways to extend more credit in the past
couple of years in an attempt to boost originations and revenue,
but in a way that could limit the amount of risk introduced into
the banking system.
Proponents of such a score have said that people who don't use
debt but who pay their monthly bills on time should be rewarded in
the same way that people who pay their debts each month are when
they go to apply for financing.
This isn't FICO's first take at alternative data. More than a
decade ago, FICO rolled out a score that also looked at alternative
data, the FICO Expansion score, but it failed to take off. The new
alternative-data score has been developed from the ground up with a
larger set of data, according to FICO. Interest in alternative
data, which went away among many lenders right after the recession,
"has come back in alignment with home prices and the economic
recovery of jobs coming back," said Craig Focardi, senior director
at CEB TowerGroup.
Traditional FICO scores are calculated based on the information
in the credit reports from the three major credit-reporting firms,
Equifax, Experian PLC and TransUnion. The new score instead pulls
data from the separate databases held by Equifax and
LexisNexis.
Write to AnnaMaria Andriotis at AAndriotis@marketwatch.com
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