Credit Basics
Boon or Bust?
A new credit-scoring system could help millions of Americans-or will it just encourage them to take on more debt?
Fair Isaac's expanded credit scoring system could help millions more Americans qualify for credit cards
NEWSWEEK WEB EXCLUSIVE
Fair Isaacs says the data will be generated through consumer reporting agencies that track particular industries like payday loans, or through evidence produced by the consumers themselves like cancelled rent checks or utility bills. For the latter, lenders could validate the payment information and submit it to Fair Isaac and it would be incorporated into the applicant's credit rating.
But consumer advocates worry that some of these non-conventional sources are looked upon negatively by mainstream financial lenders, regardless of an applicant's steady payment history. Payday loans, for example, are small, short-term loans given to consumers who use their next paycheck to pay it back. The borrower writes a personal check for the amount and the lender agrees not to cash a check until the next pay day. But the borrower often pays a large fee for such a service, as it is considered a high-risk loan. Those who seek mortgages from alternative mortgage provider may also be regarded badly, as financial institutions may assume they have been turned down by traditional banks. "The assumption that some credit history is better than none may be incorrect. We know for a fact that there are some particular items seen negatively by mainstream financial institutions," says Plunkett. "Will this relegate them to the sub-prime ghetto?"
Dillon insists that the new scoring system is not intended to expand the market for sub-prime financial products, which are aimed at riskier populations and come with high interest rates. "Our goal is to identify the people who can manage an auto loan or a credit card," he says.
In the beginning, at least, consumers for the most part will originate the process when they apply for a mortgage or credit card, for example, and the lender informs them of the additional data they can use to demonstrate their credit history. If they proceed, Fair Isaac would then help to establish their credit ratings using the non-traditional sources. Dillon says the company is not currently compiling data for creditors' pre-screening purposes so consumers need not be worried about getting inundated with a sudden flurry of "pre-approved" credit card offers-for now anyway.
But credit counselors worry that those who do apply and qualify for low-interest credit cards or loans under the expanded credit scoring may have trouble paying them off. Just because someone has paid their rent and utility bills on time does not mean they can afford to take on additional credit card payments, they say. "Consumers think, they wouldn't have given me the credit line if they didn't think I could afford to pay it back," says April Lewis-Parks, spokesperson for Consolidated Credit Counseling Services, one of the nation's largest non-profit credit counseling agencies. Many Americans are already struggling under their credit card debt, and personal bankruptcy filings have reached all-time highs, according to U.S. courts. A record 1.625 million people filed for personal bankruptcy in the 2003 fiscal year. "To use this for an unsecured credit card might not be good because they would still have to pay their rent and utilities plus they're taking on additional debt," says Lewis-Parks.
She estimates about 25 percent of those who do not have credit scores now might fall into this category. It will be up to the new scoring system to determine who they are. "It all depends on what's going to go into this score and what won't, and how it is interpreted," says Plunkett.
And it could be several months before that's clear. The extended scoring has just been introduced and, at this point, while many lending institutions have been informed, few of the 50 million consumers who could benefit will likely be aware that it exists-until they apply for a loan.
