Changes to Credit Scores from FICO and their Implications for You

It has been a busy week back to work after some time off last week; in addition, I have been traveling so my time has been limited to write although I have been reading a lot of interesting content to share with the community in the near future. I have also been reflecting quite a bit on the announcement from Steemit, Inc. yesterday which will most likely be up for plenty of discussion today and the weeks ahead. As I continue to read and assess the situation and the feedback from the community I also intend to write a post about while disappointing to hear the information and its potential implications to the ecosystem, I believe that it will allow the protocol to be built into a more sustainable ecosystem in the long run as long as the community supports and steps up to assume more roles and responsibilities. More to come…

I have decided to continued broadening my posts in other areas that I believe are valuable to the community as my general focus of investing and cryptocurrencies are somewhat limited in creating engagement around the ecosystem. When I travel, I tend to take the professional magazines that often arrive in my mailbox and read them while on route to catch up on the latest trends and news that impact us in the financial world. I came across an interesting announcement that the credit scoring Company in the United States, FICO, released discussing change to their scoring process in the near future.

I have always been a firm believer that having credit is important given the unexpected twists that occur in life. Coming from a humble background where most of the family, like many, lived “check to check” savings were never an option. If you add the consumerist mentality that has plagued my generation, the thought of being able to save six months worth of expenses in a bank account has always been unreachable for me. However, I have established a great base of credit from many institutions that allow me to access funds fairly easily if an emergency and/or opportunity arises. This access has been made possible by closely following my credit usage since I got out of College due to an unfortunate situation that I discovered when I was a victim of identity theft. After surpassing that challenge, I have been signed up in various identity protection services. This has allowed me to not only be notified of changes in my credit report but has given me great visibility on how to grow my credit score given my decisions related to personal finances.

FICO has announced that it will now include additional factors in credit scoring in the near future. The new score which will be represented with a new product called UltraFICO Score, will allow users to consider how bank account balances have trended relative to your credit card and loan balances. They will take factors such as average account balances, bill paying practices such as utilities and the duration of your accounts being opened. The intention of the change is to include important factors that add to the capability to pay instead of just the history of paying. The Company states that they have “been focused on financial inclusion” in order to “improve access to credit for the majority of Americans who participate.” The product will be available and used when traditional scoring and diligence does not provide the sufficient certainty for the institution to approve the credit. They will then active and review this score to provide additional insight to the financial capability of the person.

In analyzing the implications for these new score, it is believed that it would boost the credit scores of some 79 million Americans that fall below the average FICO scores in the country. It will also help approximately 53 million that have no current credit score given their limited use of credit. This could lead to better access for the working class to access credit in case of emergencies and opportunities which is encouraging. The ability to broaden the reach to those in need is definitely a great situation for many in the country. On the flip side, it could also punish those who do not have sound practices when using their bank accounts like those who frequently have overdrawn accounts or visually have more outflows than inflows to their accounts. “Seven in ten people who demonstrate responsible checking and savings account behavior can improve their score under the UltraFICO scoring system, the company said, some by as much as 20 points. That can translate into a lower interest rate or the difference between an approval and denial.”

However, have in mind that there have been multiple attempts to update the credit scoring system even with the FICO system but some have not been broadly adapted. They recently started to exclude certain tax liens from reports but many institutions still consider them in their diligence process to provide credit. Despite the various new approaches, institutions have remain close to the traditional approach using history of payments to assess the credit quality of clients. While alternatives can always exist, it is always the decision of the financial institution to use whatever approach they deem more aligned to their risk tolerance and exposures. Therefore, while the opportunity exist for many more citizens to be more inclusive of the financial system, it will ultimately rely on the system that has traditionally isolated them to open their doors to alternate forms of diligence in their lending practices.

I found it interesting as I believe it could allow many of those that fall into the underserved category to make an approach to slowly improve their standing by demonstrating their ability to improve their financial situation by being allowed that opportunity previously denied. While the thought is that the economy is well and things are moving forward, it is these underserved communities that continue to live check to check and feel the challenges in participating in this economy. Students are also among those that graduate college to find themselves in a credit hole due to student loans and credit cards accumulate to pay for their education. I hope that these changes can be taken advantage of for those in need in order to achieve a better distribution of financial stability around the country. I hope you found this information useful and look forward to any comments or feedback you may have.

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