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New Credit Scoring Model Could Help Millions
By: James Dimmitt
Mark and Beth, a young married couple in their twenties, established a goal to
buy a home within the first three years of their marriage before starting a
family. They budgeted and used their money wisely in order to save for the down
payment. Whenever they purchased something they always paid cash - no credit
cards for them. Why waste money by paying interest to a credit card company ?
Within two years they’d reached their savings goal and began house hunting. They
found their “American Dream” home in a new community with lots of amenities that
seemed perfect for their soon-to-be family. They were elated that their years of
saving were about to finally payoff.
But, they ran into a big problem when they went shopping for a mortgage. Even
though they had enough income to make mortgage payments and enough money saved
to afford the down payment, they had no credit history. Lenders had no FICO
score to evaluate their creditworthiness in order to offer them a loan. Fair
Isaacs Co. established a credit scoring system in the 1980’s and since then FICO
scores have been used to determine if someone will qualify for a mortgage and
the interest rate they would pay.
Over 50 million U.S. adults fall into the same category - they have either too
little credit history or no credit history at all. But now thanks to a new FICO
formula, called FICO Expansion Score, lenders will now have opportunities to
extend credit to consumers based on non-traditional credit data that are
excluded from credit bureau reports.
FICO Expansion will consider a wide range of financial transactions including
payment activities such as rental payments, deposit accounts, payday loans, book
or CD club payment plans, and retail lay-away plans.
Who stands to benefit from this new scoring model? Anyone who makes little use
of banks, credit cards, or checking accounts. The “credit underserved” claims
Fair Isaac Co, which includes young adults, low-income consumers, widows or
divorcees, and immigrants. And while those in the credit card and mortgage
industry see this new scoring model as a potential benefit, those in the credit
counseling sector foresee potential problems.
Fair Isaac CEO Tom Grudnowski is excited about his company’s new credit-scoring
resource. “This extension of the FICO score gives lenders and other businesses
another powerful tool ..., while expanding service options for consumers who
have missed out on opportunities simply because they lack a traditional credit
history.”
The opposition, namely debt and credit counselors, see both the good and the
bad. Some consumers will benefit by qualifying for less costly credit
arrangements. However, others could fall prey to becoming overextended unless
they also receive some basic credit and debt education.
Tom Hicks, a credit counselor in Chicago, worries that “with the average
American household owing $8,000.00 in credit debt, this could open the door to
others finding themselves unable to handle credit properly. Ultimately the
burden lies with the consumer,” he says.
Fair Isaac Co. estimates that at least half of those without traditional credit
profiles will benefit from this new scoring method.
About the Author:
© 2005, http://www.yourfreecreditreportnow.com Author: James H. Dimmitt James is
editor of “To Your Credit” a FREE weekly newsletter focusing on managing your personal finances and credit. Subscribe and get a FREE copy of your credit
report when you visit: http://www.yourfreecreditreportnow.com |
