By AnnaMaria Andriotis
Millions of Americans unable to obtain credit cards, mortgages
and auto loans from banks will receive a boost with the launch of a
new credit score aimed at consumers regarded as too risky by
lenders.
The new metric, set to be announced as soon as this week, is
being developed by Fair Isaac Corp., creator of the most widely
used consumer-credit scores, and is being tested in a pilot phase
with credit-card issuers. Fair Isaac said it hopes to make as many
as 53 million people who don't have credit scores more acceptable
to lenders.
People without scores in most cases don't use debt either by
choice or because a negative credit event, such as a bankruptcy,
foreclosure or a collection account, has shut them out of
mainstream borrowing.
The new score is largely a response to banks' desire to boost
lending volumes by increasing loan originations to borrowers who
otherwise wouldn't qualify, many of whom tend to be charged more
for loans. But the new yardstick will also throw a spotlight on
consumers who often are deemed riskier than the rest of the
population and could saddle banks with losses if they fail to make
good on their loans.
The new score, which isn't yet named, will be calculated based
on consumers' payment history with their cable, cellphone, electric
and gas bills, as well as how often they change addresses and other
factors, according to Fair Isaac, also known as FICO. Traditional
FICO scores that lenders use in the approval or rejection process
are calculated based on the information in the credit reports from
the three major credit-reporting firms, Equifax Inc., Experian PLC
and TransUnion.
The new score will instead pull data from a separate database of
telecommunications and utilities providers maintained by Equifax.
It also will incorporate data from a LexisNexis database, including
how often people change addresses, with frequent changes suggesting
less stability.
FICO and 10 credit-card issuers, which the firm declined to
name, have been quietly testing the new score since November. The
firm plans to roll it out nationwide by around year-end. Some 15
million of the 53 million unscorable Americans already can be
scored using the alternative data, said Jim Wehmann, executive vice
president of scores at FICO.
Lenders often consider consumers who don't have a credit score
to be as risky or even riskier than so-called subprime borrowers,
who have low FICO scores, and often deny their loan applications or
offer them interest rates that are very high. Without a score and
little or no credit history, lenders have a difficult time figuring
out whether the borrower is likely to pay back a loan.
The new score could help applicants who don't use credit often
but are responsible with their monthly payments to get approved for
financing. Proponents of scores based on alternative data have said
that people who are on time with their other bills should be
rewarded similarly to people who are on time with their debt
payments when it comes to getting approved for new loans.
But many borrowers who don't have a traditional FICO score are
very risky. Some 40% of the roughly 28 million people who have thin
credit files and no score--an additional 25 million have no credit
file--have had a major negative event like a bankruptcy or
collection and haven't had any updates on their credit files in at
least six months, according to FICO.
Besides increasing their pool of borrowers and loan
originations, banks stand to earn more in interest revenue from
riskier borrowers. Lenders charge higher interest rates and in some
cases extra fees to borrowers who present a higher risk of falling
behind on debt payments.
The new score is the latest attempt by FICO to bring more
consumers into the credit system and for the firm to stay in
lenders' good graces at a time when banks' profits have been
squeezed by low interest rates and lackluster demand for loans.
The announcement comes as the housing industry seeks ways to
make people more creditworthy to increase loan originations, an
important source of profit for banks and real-estate agents. The
National Association of Realtors, along with other real-estate
groups, will sponsor a symposium on credit access on Wednesday,
which is billed as the first of its type to discuss ways to
increase access to mortgages using alternative credit-scoring
systems.
Lenders use FICO scores in 90% of consumer-lending decisions,
according to CEB TowerGroup, a financial-services research
firm.
About 200 million adults in the U.S. have FICO scores, which
range from 300 to 850, based on factors such as whether they pay
their debts on time and maintain low credit-card balances, and how
long they have been managing debt. The new score won't apply to
them. To have such a score, consumers must have at least one
account, generally a loan or credit card, that is older than six
months, and at least one account on their credit report must be
updated, which can occur when there is activity on it, in the past
six months, among other factors, said John Ulzheimer, president of
consumer education at CreditSesame.com, a credit-management site,
and a former manager at FICO. One account can satisfy both
conditions, he said.
Among the potential new crop of borrowers created by the new
credit score, those who successfully apply for 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
a regular FICO score, which will make it easier for them to get
approved by other lenders, including car-loan and mortgage
lenders.
The new score comes after years of intensifying pressure from
lenders on FICO to help make more people creditworthy. Lenders have
been asking FICO for a score that will allow them to lend to more
borrowers, including those who haven't been using credit but are
responsible with monthly payments, said Dave Shellenberger, senior
director of scoring and predictive analytics at FICO.
"There are more lenders who are very interested in addressing
[this]--I don't think you saw that six or seven years ago," he
said.
Mortgage firms Fannie Mae and Freddie Mac, which require lenders
from whom they buy mortgages to use FICO scores when underwriting
applicants, began reviewing alternative credit-scoring models,
specifically scores from VantageScore Solutions LLC, last year.
VantageScore, which has been a small player in the credit-score
market, is starting to make inroads. More than 2,000 lenders,
including six of the 10 largest U.S. banks, and other industry
participants, such as landlords, used VantageScore scores in their
lending decisions in 2014, a 24% increase from 2013.
In January, the Federal Housing Finance Agency, which regulates
Fannie and Freddie, directed the companies to "assess the
feasibility of alternate credit score models and credit history in
loan-decision models" in its list of priorities that it released
for this year.
Robin Sidel contributed to this article.
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