The FICO credit score is a tool for lenders to measure the credit worthiness of potential borrowers. Several factors go in to calculating this score, including payment history, amount of debt, length of credit history, types of credit, and number of inquiries from other possible lenders. As you can see, calculating a FICO credit score and qualifying for credit depends on people actually using credit and building a history. But what about the 53 million American’s who simply don’t use credit, are they all unworthy borrowers? The new FICO credit score aims to include these previously unscored potential borrowers in order to open up credit opportunities for them.
How Does the New FICO Score Work?
The new FICO credit score will add in two primary new factors. First, it will look at any activity from reporting utilities. That means phone bills, cable, electricity, etc. The idea is even if someone has no traditional credit history, if they pay their bills on time, they will probably pay their debt on time.
The second new factor will look at how often a person moves. Here, frequent moves will suggest instability and a potentially high risk borrower. Combined, this new score is intended to open up credit opportunities for the 53 million American’s who are currently unscored. With the current model, even if people have a steady income and always pay their bills on time, it’s difficult or impossible to get a mortgage or a car loan without a credit history.
What Will the New FICO Scores Mean for You?
That depends. FICO is uncertain about the future of the new score, but as it stands right now, it is an alternative score and the traditional scoring method will still be used for people who have a credit history. The pilot program of the new score, rolled out in November to 10 different credit issuers, is supposed to identify low-risk borrowers, allow them to build a credit history, and then begin scoring them with the traditional model.
If the new score replaces or is combined with the traditional model, consumers should be mindful of changes to their credit score. In that case, a late cable bill or frequent moves could bring down your score and make obtaining affordable credit difficult. Consumers will also want to keep track of how their utilities report their activities in addition to monitoring their traditional score. Reporting errors are common, and you can’t dispute something if you never know it’s there.
The jury is still out on whether these changes will be good or bad for borrowers. But, if you’re one of the 53 million unscored Americans, the new FICO score will definitely mean new credit opportunities for you.
If you need help repairing your credit score, don’t hesitate to call Luftman, Heck & Associates to schedule your free consultation at (216) 586-6600.