Fair Isaac is developing a credit score aimed at the millions of people who are unable to obtain credit cards, auto loans and mortgages because lenders consider them to be too risky.
About 53 million Americans are unable to qualify for most types of bank-issued consumer credit because they lack a credit history. The new Fair Isaac product "is largely a response to banks desire to boost lending volumes by increasing loan originations to borrowers who otherwise wouldnt qualify, many of whom tend to be charged more for loans. Instead of using credit reports from Equifax Inc., Experian PLC and TransUnion, the new Fair Isaac credit score for underbanked consumers will be developed from data gleaned from consumers' histories in paying utility bills. The score will be calculated based on consumers payment history with their cable, cellphone, electric and gas bills, as well as how often they change addresses and other factors, according to Fair Isaac, also known as FICO. Traditional FICO scores that lenders use in the approval or rejection process are calculated based on the information in the credit reports from Equifax, Experian and TransUnion. The new metric, yet to be named, is set to be announced as soon as this week. It's being tested in a pilot phase with 10 unnamed credit card issuers. FICO plans to roll it out nationwide by year-end.
Some 15 million of the 53 million unscorable Americans already can be scored using the alternative data, said Jim Wehmann, executive vice president of scores at FICO. In most cases, people without credit scores dont use debt either by choice or because of a negative credit event. Often, a bankruptcy, foreclosure or a collection account has shut them out of mainstream borrowing.The new score could help applicants, who dont use credit often but are responsible with their monthly payments, get approved for financing. Proponents of scores based on alternative data have said that people who are timely with paying their other bills should be rewarded similarly to people who are on time with their debt payments when it comes to getting approved for new loans.
Lenders often consider consumers who lack a credit score to be as risky or even riskier than subprime borrowers, who have low FICO scores. Lenders often deny such loan applications or offer them interest rates that are very high. Without a score and little or no credit history, lenders have a hard time determining whether the borrower is likely to pay back a loan.Many borrowers who dont have a traditional FICO score are, in fact, risky. An estimated 40% of the roughly 28 million people with thin credit files and no score - an additional 25 million have no credit file - have had a major negative event such as a bankruptcy or collection and havent had any updates on their credit files in at least six months, according to FICO.