Recently, Experian, FICO, and Finicity announced a new credit score called UltraFICO which draws on checking, savings and money market account history in addition to traditional credit history to determine FICO scores. The new UltraFICO Score, reflecting responsible financial management activity, will launch as a pilot program in early 2019 and will be broadly available to lenders by the end of next summer. Today, we introduce this new scoring model and consider the potential impact on consumers.
The Current FICO System
The FICO score is a measure of consumer credit risk used by most banks and other businesses extending credit. In the current system, scores are calculated on how well consumers have paid past debts as reported to the three major national credit bureaus: Experian, Equifax, and TransUnion. But, it fails to take into consideration how consumers manage their cash. Consumer credit files can vary widely with each different bureau, and therefore FICO scores also vary depending on which bureau provides the credit history.
There is already several different types of FICO credit scores: generic, mortgage, auto, bankcard, installment loan, collection score, and NextGen. There have also been a number of iterations of the FICO score since it was first introduced in 1989. Some have been broadly adopted while others were less popular.
The New UltraFICO Score
On October 22, 2018 in Las Vegas, FICO, Experian, and Finicity jointly announced a new credit score that factor’s in how consumers manage their cash in checking, savings and money market accounts as well as the historically used factors. The new system is being marketed to the public under the banner of inclusion. This could ultimately lead to problems down the road for lenders, as this can be viewed as a way to expand loan approval for some higher risk borrowers by improving credit “for the majority of Americans” but especially for those who fall in the grey zone with scores in the upper 500s to lower 600s and for consumers with limited credit history.
Considerations for High Net Worth Individuals
UltraFICO’s additional factors may be helpful in improving a credit score for those with some blemishes but also with meaningful assets. The new scoring model may also prove helpful for high net worth individuals who don’t have much credit history because they have little use for it. For example, someone who has not utilized debt and owns their house(s) and car(s) outright for several years may wish to obtain credit when purchasing an investment property or a business. These new factors would likely provide an improvement to one’s credit scores. In addition, younger borrowers who have accumulated assets but have limited credit history will also likely benefit from the new system.
Credit scores are widely used because they are inexpensive and generally reliable, but there is room for improvement. The new UltraFICO model may be helpful for those who have limited credit history because they have not historically utilized debt as well as for those with substantial assets. Time will tell whether lenders broadly adopt the new scoring model, and it is important to be aware of developments as UltraFICO is rolled out as its adoption may affect your future credit needs.
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