The company responsible for credit scores, the Fair Isaac Corporation (FICO), has announced a new scoring model, one which aims at encompassing millions of underbanked individuals - those with no access to credit cards or loans. In their new system, the way in which consumers pay their bills and how often they relocate will have an impact. FICO hopes that by incorporating these factors, it will provide access to credit for close to 15 million Americans.
Currently, many consumers find themselves in a catch-22. To obtain credit, they need a credit history, but they can’t have a credit history without having had credit! This is especially problematic to those individuals who don’t have access to retail banks. In a recent report, one of the three major credit reporting agencies, Experian, proposed that including new data points could serve as a solution. Just over month after the report’s publication, FICO announced its intentions to act on the suggestions.
How Will the New Scoring Work?
The better you are at paying rent, telecommunications, cable, and utilities, the more positive impact it will have on your FICO score. Additionally, the longer you stay at one address (as opposed to moving around frequently) the better it will be for your report. To credit issuers, this kind of behavior is indicative of someone who is likely to pay back any credit extended to them. Individuals living in one place and paying their bills are seen as more economically stable and likely to pay off a loan.
The information about bill payments will be grabbed from an Experian database, while the data on address changes will come from LexisNexis. Both agencies have millions of different sources reporting this information to them, from landlords to utility companies.
According to their report, Experian anticipates that approximately 50% of consumers who previously had subprime scores (300 – 600) will now be boosted up. The estimates predict 54% will now have a score between 601 and 660, which can easily qualify them for decent credit cards with reasonable rates and terms.
The current breakdown of how a FICO score is determined can be seen below:
One concern behind this new development is the lack of accountability for the correct data being reported. Due to credit card legislation – specifically the Fair Credit Reporting Act - the data suppliers (referred to as a ‘furnishers’) are allowed to report any piece of information on a consumer, as long as it contains the consumer’s name. They are not required to verify whether the data is attributed properly to the correct consumer – a fact that was reinforced by a U.S. Court of Appeals decision on Saver v. Experian Information Solutions (390 F.3d 969). With more information being collected, there are more points of failure.
This is not a reassuring point, considering that a 2014 Consumer Report survey found that out of 3,000 individuals, 20% found mistakes on their credit report. While it possible to appeal mistakes in your report, it often happens after damage has been done – meaning after you’ve been denied a loan or application. There has been no word from any of the companies involved as to any steps they would take to avoid misattribution.
In the Saver case mentioned above, the judge justified that Experian’s failure to verify the validity of reported information by citing the complex nature of the company’s data – 200 million names and addresses, and 2.6 billion trade lines. If mistakes are at least as prevalent as we’ve seen in the Consumer Report survey, 1 in 5 Americans are being misrepresented on their credit reports. If Experian expands its data collection systems, without improving accuracy, consumers will have to become increasingly vigilant of their FICO score.