Conscious people have to navigate the system too. For those of you that want to own your own home, currently own a home and want to improve your credit rating so you can refinance or purchase additional property (perhaps to rent a second home, to get into rehabbing or to buy/sell homes on your own) this information may be helpful.
New scoring tools empower credit weaklings
Tuesday November 22, 6:00 am ET
If you've been rejected for a mortgage or other loan because of a bad FICO score, don't despair. New forms of credit scoring use your payment record on utility bills, rental units and payday loans to assess your ability to repay loans.
An estimated 50 million consumers are locked out of access to credit because they lack the credit history needed to generate a decent FICO score. The FICO score estimates your ability to repay based on your past credit history as detailed in traditional credit reports.
Fair Isaac Corp., the company that pioneered this form of credit scoring, produces the FICO score and is offering one of the new credit scores, which it calls the FICO Expansion score. Along with other players in this rapidly expanding market, Fair Isaac hopes to attract lenders eager to expand their customer base.
"One of the problems for people who don't have good FICO scores is the collection of enough positive data to make the score an effective predictive tool," says Tena Friery, research director of the Privacy Rights Clearinghouse, a California-based consumer advocacy group. "Estimates are that 50 million consumers are affected by a lack of credit history, so this score has the potential to give people the chance to own a home who otherwise wouldn't be able to get into the market."
The various scores
Because of Fair Isaac's status as the 800-pound gorilla in the credit scoring market, the FICO Expansion score has a built-in advantage over the other types of scores. Here's a score card:
- FICO Expansion Score
- Drawing on alternative credit data such as bank account records, payday loan payment records and installment purchase plans, Fair Isaac produces a credit score that is modeled on the traditional FICO score's 300 to 850 point range.
- "In developing the Expansion score, Fair Isaac analyzed anonymous alternative credit data to statistically determine what factors are most predictive of future credit performance," said Lisa Nelson, vice president of business operations for Fair Isaac in an appearance before the House Financial Services Committee in May. "Factors that do not have predictive value and factors that by law cannot be used in the credit decision are excluded from consideration."
- PRBC PCRB, which stands for Payment Reporting Builds Credit, turns the traditional credit scoring model on its head, offering consumers the chance to proactively build a credit profile through tracking their payment history in such areas as rent, private mortgages, phone, utility, insurance premiums and child-care payments. Consumers can sign up through AccountNow, a partner with PRBC and arrange to have their bills paid through this service. All payments will automatically be forwarded to PCRB and be included in your credit profile. There are fees involved to enroll in the AccountNow Vantage MasterCard program, which is part of the AccountNow service.
- Anthem Score Developed by First American CREDCO, which processes and distributes credit information on consumers, the Anthem score is similar to the FICO Expansion Score. The Anthem score is a two-tiered score: The first score comes from First American's nontraditional credit report; the second is a numerical risk assessment score. Scoring is based on a consumer's history of paying rent, utilities, insurance and child-care expenses. In building the risk score, Anthem takes into account how long a consumer has been paying bills in a timely fashion as well as what types of credit the consumer is using.
- eFunds eFunds is the parent company of the ChexSystem banking clearing house. The eFunds Debit Report provides lenders with an overview of a consumer's check writing history, check order history, account opening inquiries, deposit account collections and any accounts closed for fraud or abuse.
These new forms of credit scoring are a wedge into the traditional credit market that many consumers can use to prove to lenders that they are a good credit risk. "There are many people who may be creditworthy but who don't get credit because of the limits of the traditional FICO score," says Bruce McClary of Clearpoint, a consumer credit counseling agency. "For example, many Hispanics immigrants use cash rather than credit. They save, which is very admirable, but they aren't establishing any type of credit history."
Many other consumers may be able to access credit through nontraditional scoring methods. These include recent high school or college graduates, divorcees or widows and people with some blemishes on their traditional credit report.
"These scores open up a whole new world of opportunity for people who have chosen not to access credit or who have had issues with credit," says Cate Williams, vice president for financial literacy for Money Management International, a consumer credit counseling agency.
While many consumers who haven't had access to credit may applaud these new scores, other consumers may rue the day that a lender relied on one of these scores if that credit isn't used wisely.
"There are problems that could arise with any system. There is always the potential for abuse where you could have predatory lenders using these scores to reach people who they would otherwise not be able to get to," says McClary.
Williams warns consumers not to be tempted into taking on more credit than they can handle. "If you get a credit card as a result of these new scoring models, ask yourself what do you need that card for," she says. "Nine out 10 people will say it is only for emergencies, but a shoe sale or dinner out is not an emergency. Also find out what costs are involved in any loan or credit card."
As with traditional credit reports and the traditional FICO score, the newer scores are only as good as the data they are built on. Just as there can be mistakes in your credit report, inaccurate information obtained on your nontraditional payments can negatively impact your ability to get loans. "Fair Isaac is becoming a specialized consumer reporting agency so the Expansion score will be a dispute resolution process where you can fix problems with this score," says Friery.
Since PRBC is consumer-driven, consumers will have free access to their data once they are enrolled in this program. At this time, it's not clear what access consumers will have to eFunds Debit Reports or Anthem Scores since they are so new.