Buzz
Next year will bring a major change to the calculation of FICO credit scores, marking the most significant update in the past 30 years.
Instead of focusing mainly on a consumer’s credit payment history, Fair Isaac Corp. (the creator of FICO scores) will also consider how individuals manage the funds in their checking, savings, and money-market accounts, according to the Wall Street Journal.
The new UltraFICO score aims to increase a person’s chances of approval for credit cards and personal loans. In addition to evaluating on-time payments, FICO will take into account factors like checking account balance, account history duration, frequency of transactions, and overdraft history, as reported by the Journal:
If an applicant’s traditional FICO score is insufficient, a lender may offer to recalculate the score based on banking activity. Potential borrowers who maintain a balance of several hundred dollars in their accounts, have long-standing accounts, frequently make transactions, and avoid overdrawing are likely to see their scores increase, according to FICO.
This change is designed to assist those lacking a broad credit history. According to the WSJ, “Consumers with an average balance of at least $400 who haven’t overdrawn in the past three months are likely to benefit.” A representative from FICO also noted that some scores might drop. FICO claims the Ultra score will “appeal to the underbanked – the self-employed, millennials, immigrant entrepreneurs, migrant savers, and remitters” and offer a fresh start for those “recovering from financial hardship.”
However, as Ted Rossman, an industry analyst at CreditCards.com, points out, “Including bank account balances could unintentionally shift the focus to income and assets,” says Rossman. “In the past, your FICO score was based on how you managed your money, not how much you had.”
While these changes are set to come from FICO next year, it may take some time before they reach consumers. “FICO’s last significant update, FICO 9, was introduced in 2016, but most lenders are still using FICO 8,” Rossman explains. “As a result, issues like medical debt, paid collections, and tax liens continue to negatively affect many consumers more than expected.”
For those without a credit history or with some blemishes on their record, this new system could provide a much-needed boost.
