A little over a month ago, I wrote a piece on Deserve, a startup credit card company that focuses on the over 15 million borrowers with little to no credit history. How are they are able to extend credit to these customers? By including their checking and savings account activity when determining their creditworthiness.
At the time, I said that this was an encouraging sign. Not necessarily because I wanted people to have easier access to credit cards, but because it gave me hope that at some point in the future a credit score could be built that relied less on credit cards.
I know it sounds crazy, but I’ve always thought it to be a little nuts that young couples who have consistently paid their bills and put money aside in savings should be penalized on a mortgage application for NOT having a debt history. Wait, what?
So when I read about Deserve’s business model, I was hopeful that the industry could be primed for a major shift. It turns out I was right.
This week, FICO made a huge announcement. They unveiled a new credit scoring model called UltraFICO, which will make its debut in 2019. It will be an opt-in way to enhance your regular FICO score by taking into account your checking, savings, or money market account histories.
And FICO says that “7 out of 10 consumers who have no FICO score whatsoever, could have an UltraFICO score.”
According to FICO, your UltraFICO score will be based on four main indicators:
- Evidence of savings and keeping a healthy average balance
- Maintaining a bank account over time
- Avoiding having a negative balance
- Regularly paying bills and making other bank transactions
This is unequivocally exciting news!
Yet some articles I’ve read have been less enthused by the announcement. Their concern is that when bank account data is added to the mix, certain people with already high credit scores could actually see their scores go down.
And they are right.
If you are someone who always makes the minimum payments on your credit cards to keep your credit score high, but you’re often late on bills or frequently overdrawn in your checking account, then the UltraFICO score isn’t for you.
But FICO says that “7 out of 10 consumers that show average savings of $400 without negative balances in the past three months see an increase in their FICO Score with the UltraFICO Score.”
A Future That Rewards Prudent Financial Choices
To boil it all down, we are looking at the possibility of a future where making wise financial choices plays the most important role in your credit score, NOT learning how to game the credit scoring system.
The current FICO system is confusing to the average conservative consumer. For instance, unless you were trained to think otherwise, few people would naturally assume that:
- Closing down a credit card actually LOWERS your credit score due to the fact that it raises your credit utilization rate.
- Adding MORE credit cards will RAISE your credit score over time (as long as your monthly spending doesn’t change) due to your credit utilization rate going down.
The preceding statements don’t make simple, logical sense. At some point, we all had to have someone explain them to us so that we could play along in the credit score game.
And for those of us who have mastered the credit score system while still paying our bills and saving consistently, UltraFICO will only raise our scores.
Could a credit score that actually looks at your real spending and savings habits hurt certain customers? Sure.
But, first of all, let’s not forget that is an opt-in system. If you don’t think UltraFICO would help you, you don’t have to use it.
But even if FICO decided, at some point, in the future to include banking activity in their regular FICO score, I don’t think this would be a bad thing.
Could it hurt people’s scores in the short-term? Yes.
But in the long-term, I think it would be a net positive for the overall financial health of American consumers. Why?
Because it would be a credit scoring system that pushes people to save and pay their bills on time in order to raise their credit scores rather than opening new lines of credit.
And I’m ok with that.