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
August 25th - When Craig Dillon moved to the United States from Australia in 1999, he had a stable, high-paying corporate job and a good credit history-in Australia. But none of that helped him when he applied for a new credit card, since he had no U.S. credit history.
He's got plenty of company. At least 50 million Americans lack the credit to get credit. Without the conventional history to establish the credit score used by lenders to determine an applicant's ability to repay a loan, it's tough-and, in some cases, nearly impossible-for some consumers to obtain a mortgage or credit card. Now Dillon is trying to make the process easier. As vice president of global scoring solutions at Fair Isaac Corp., the company behind the credit scores lenders use to judge applicants, he's developing a new, extended scoring system that uses information from non-traditional sources. By taking into account data like consumers' monthly rent payments, utility bills, and rent-to-own retail accounts-which are not normally reported to credit bureaus-Fair Isaac hopes to expand the credit files of millions of divorcees, immigrants, recent college graduates, and others who don't have a traditional credit history. "There's a fragment of population that is not reported and it's difficult for them to break in. We're trying to address this unequal access," says Dillon. "I definitely would have benefited from this if it had been around five years ago."
Creditors have become more dependent on a consumer's FICO score as the application process has become increasingly automated, with many people applying for loans and credit cards over the phone or Internet. Fair Isaac's computerized model, which generates a score between 300 to 900, is now based on payment and balance data submitted by banks, credit card companies, and mortgage lenders. The higher the applicant's score, the lower the repayment risk and, hence, the lower the interest rates. But an estimated 5 to 15 percent of all loan applications are not even processed now because there is not enough credit information about the applicant to compute a score.
"Generally speaking, without traditional credit scores many lenders simply can't facilitate a transaction, whether it's a credit card, a loan or a mortgage," says Dan Drummond, spokesman for Your Credit Card Companies, a consortium of financial-services firms. "We think this will open up access to credit at reasonable interest rates for people who probably already should be qualifying for it already. It could make a huge difference."
According to Fair Isaac estimates, about 20 million Americans have no credit information on file at all and the remaining 30 million or more don't have enough information on file to create a traditional credit score. How much the expanded scoring system will help them, though, is still up for debate. "Depending on what kind of information they are going to use, it could be a boon for consumers who previously had no credit history or it will be major bust, opening them up to targeted marketing by a whole range of sleazy creditors," says Travis Plunkett, legislative director for the Consumer Federation of America. "The devil really is in the details."
