A new way to calculate your FICO score could lead borrowers to having higher numbers.
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Credit scores have been based mostly on borrowers' payment histories, but a new scoring system also taking into account how you manage your money, will be rolled out.
Fair Isaac Corp., which is the creator of the widely used FICO credit score, plans in early 2019 to factor in how consumers manage the cash in their checking, savings and money-market accounts., according to Dow Jones Newswires.
The UltraFICO Score, as it's called, isn't meant to weed out applicants. Rather, it is designed to boost the number of approvals for credit cards, personal loans and other debt by taking into account a borrower's history of cash transactions, which could indicate how likely they are to repay.
The new score could be the way for lenders to boost loan approvals. It is among the biggest shifts ever for credit-reporting and the FICO scoring system.
Borrowers currently have little control over what's in their credit reports, save for the ability to contest information they believe is inaccurate.
Lenders, collections firms and other parties feed payment-history data to the major credit-reporting firms, Experian, Equifax and TransUnion, and that information determines consumers' FICO scores. Lenders, in turn, use FICO scores to help make most of their lending decisions.
The new score can be consider an appeal of sorts.
If a consumer’s traditional number falls short, a lender can offer to have the score recalculated to reflect banking activity. Would-be borrowers with at least several hundred dollars in their accounts, who have had them for a while and who transact frequently and don't overdraw are likely to see their scores rise, according to FICO.
A decade after the subprime mortgage binge nearly brought down the U.S. financial system, consumer lenders remain wary of borrowers with low credit scores.
Of U.S. consumers with credit scores, a record 58.2 percent had a score of 700 or higher on a scale that tops out at 850. The average FICO score is at a record 704. Lenders may have different cutoffs, but Experian considers scores under 670 subprime.
According to FICO, around seven million applicants who have low credit scores as a result of thin borrowing histories would likely see their scores improve under the new system.
There's a risk that the new scores could make some iffy borrowers look more creditworthy than they are.