Specialized credit check option from FICO could make it easier to qualify for new credit.
This month, FICO announced they were partnering with Experian to roll out a new credit scoring model called UltraFICO. The UltraFICO™ score is designed to help consumers that have low traditional FICO scores to qualify more easily for new credit. FICO and Experian say the new score will launch in 2019 under a pilot program with a “handful of lenders.”
How is UltraFICO different?
The new credit scoring system will basically allow a consumer with a low traditional FICO score to authorize a lender to check additional information. Instead of looking solely at credit information, it would also consider bank account information from checking, savings and Money Market accounts.
Much like checking your credit history, this new model will look at your banking history. It will factor in how long you’ve had your bank accounts., how much money you have in them and how much you use them. So now, being a responsible budgeter and basic account manager can benefit you by boosting your credit score.
“This isn’t the first time that credit scoring experts and lenders have promoted the idea of using bank account information,” explains Gary Herman, President of Consolidated Credit. “FICO has even made some previous attempts to improve scoring for those who are traditionally “unscorable.” And some lenders who specialize helping subprime consumers who can’t qualify for traditional credit already check bank account information. But UltraFICO looks like it will bring this concept into the mainstream.”
How UltraFICO works
UltraFICO would not become the preeminent score for everyone. If you already have a high traditional FICO score, then UltraFICO would not even come into play for you.
But if you have a less than perfect traditional score that won’t allow you to get approved for a loan, you could authorize the lender to check some or all of your bank account history. You’d basically tell the lender what accounts you want them to include, then they would review your account history accordingly.
If you have a low credit score, but you’ve at least maintained a basic checking and savings account for a number of years, then UltraFICO would help you qualify. You could get approved for a loan where you would have faced rejection.
But the new score will not be fully available to everyone in 2019. It’s only rolling out as a pilot program with a few lenders. And even if the score goes fully public after the pilot program, not all lenders would necessarily use it.
“There are a wide range of credit scores that exist in the market today,” Herman explains, “and different lenders use different scoring models. For example, most lenders currently use FICO 8 or VantageScore 3.0, even though there’s a FICO 9 and VantageScore 4.0 that offer some distinct benefits for consumers. The newer scores don’t give as much “weight” to medical collections. This is extremely beneficial for consumers, but many don’t enjoy that benefit because their lenders are still using the older scoring models.”
What UltraFICO means for people enrolled in a debt management program
“Getting out of credit card debt isn’t always easy on your credit score,” Herman continues. “Things like missed payments or collection accounts can hit your credit score hard. Even just one collection account can drop your score by as much as 50 to 100 points. So, people often have to work hard to rebuild their credit after they get out of debt.”
Herman says UtralFICO could make it easier for people to get new credit after they’ve overcome challenges with debt. It would make it easier to get traditional credit and loans, instead of having to work your way up using tools like secured credit cards. You could basically turn the page and get a completely fresh start sooner.
“For most people, a debt management program has a positive or neutral effect on their credit,” Herman says. “You may graduate with at least a fair score, even if you started the program with a bad one. But one advantage that DMP graduates have is a balanced budget. You also have the ability to start building emergency savings back faster. So, if those types of financial tools are taken into account by lenders, DMP participants can start taking on new credit more easily after they graduate.”
Understanding the risk of easier access to credit
Herman says that one thing people need to consider if UltraFICO goes fully public is that just because you can get credit, it doesn’t mean that you should.
“Even with an excellent traditional FICO score, there’s still some risk involved in taking on new credit,” Herman explains. “There’s always that question of will you be able to repay the debt without any problems. The point of credit scoring is to ensure that people only take on credit that they can afford to repay. Expanding credit access is great, but it also means more risk for consumers who may be already facing financial challenges.
Herman advises anyone – regardless of their credit score – to think carefully before taking on a new debt.
- First, ask yourself if this is really a credit line that you need. Is there any way to avoid taking on debt by using your savings? Or can you budget to save up for what you want to buy or to make a larger down payment?
- Always make sure you can afford the monthly payments. When it comes to loans, lenders usually check to make sure you can afford the payments using your debt-to-income ratio. But for credit cards, rising balances could hurt your budget.
- Make sure to spread out new credit applications by at least six months. This gives you time to ensure you can afford the last debt before you take on a new one. It’s also better for your credit score.