Signed, Nervous Borrower
Dear Nervous
Big changes are in the works at Fair Isaac Corporation, better known as the folks that bring us the FICO credit score. The financial report card that determines if we get approved for loans, the interest rates we pay, and a heap of other important concerns like auto insurance rates, employment screenings, and rental applications. Beginning in 2019 a new score called UltraFICO will take into account how much money a person has in their checking and savings accounts. Yes, you read that right – if worrying about late payments on your credit cards wasn’t stressful enough, now you need to worry about the balance in your checking account too? Yikes!
Relax it’s not bad news. In the past the FICO score has been primarily based on two things: a person’s payment history on credit trade lines, like credit cards and auto loans, and the total amount of debt a person carries. Non-credit financial information like how much money you keep in the bank, your income, and net worth don’t factor into your FICO score. That’s why it was once reported that America’s third richest person, Warren Buffet, only sported a very average 718 credit score. Hey I think I have a better credit score than Warren Buffet! (Remember the score ranges from 300 to 850).
One problem with FICO’s current credit scoring system is that it’s not always an accurate reflection of a person’s creditworthiness. Moreover, the system is ripe for errors. Like the time my Aunt Bernadine found a collection listed on her credit report from Wild Ernie’s Erotic Excursions. Hey, it wasn’t hers…..really!
Seriously though, the primary motivation here is that banks and lenders are looking for people to lend money to because years of strict credit score standards have limited the number of eligible borrowers. It’s business and they need to churn more loans. So the idea is that people with a few credit hiccups might have compensating factors, like solid banking habits, that deem them less risky borrowers.
UltraFICO will likely hike the credit scores of many credit challenged consumers who can demonstrate favorable banking activity. What’s favorable? For starters folks with an average account balance of at least $400 and no overdrafts within the last three months. That’s good news for some. But if it feels like a tall order, rest assured that UltraFICO is an optional score that you can request a lender to calculate if your regular aka traditional FICO score falls short. In the event your banking activity isn’t up to speed or you just don’t want to share any more personal information with FICO (I don’t blame you!) you have the right to stick with your traditional FICO score.
Aside from UltraFICO other borrower friendly changes occurred to the credit scoring system last year. Specifically, the three main credit bureaus Equifax, Experian, and TransUnion began removing many tax liens and civil judgments from credit reports. Moreover certain non-loan collections such as gym memberships, speeding tickets, and library fines are also being deleted thanks to a recent settlement with state attorneys generals. Whew….we never did find that copy of I Really Like Slop that my four-year-old checked out last year.
So overall if your credit is anything less than picture perfect – cheer up. Many of these changes might just boost your FICO score a few points. And remember to pull your credit report once a year using a trusted source like annualcreditreport.com or Credit Karma which provides a free credit score estimate.
Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.