"Ultra-FICO" to Boost Credit Scores Giving Millions More Access to Credit

Mike Mish Shedlock

Just in the nick of time not: Fair Isaac is launching a new type of credit score that will give millions more credit.

Just as the economy is peaking, consumers with a low FICO could get a higher "UltraFICO", a new score that factors in bank-account activity as well as loan payments.

Credit scores for decades have been based mostly on borrowers’ payment histories. That is about to change.

Fair Isaac Corp., creator of the widely used FICO credit score, plans to roll out a new scoring system in early 2019 that factors in how consumers manage the cash in their checking, savings and money-market accounts. It is among the biggest shifts ever for credit-reporting and the FICO scoring system, the bedrock of most consumer-lending decisions in the U.S. since the 1990s.

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, in the works for years, is FICO’s latest answer to lenders who have been clamoring for a way to boost loan approvals.

UltraFICO is the latest in a recent series of changes by credit-reporting and scoring firms that are helping boost consumers’ credit scores.

Equifax, Experian and TransUnion last year began deleting most tax-lien and civil judgment information from credit reports. They also have been removing certain accounts in collections, following settlements with state attorneys general dating back to 2015 over how they manage errors and certain negative information on credit reports.

Eight million consumers who had collections accounts completely removed from their credit reports in the 12 months ended in June experienced a credit score increase of 14 points on average, according to a recent Federal Reserve Bank of New York report.

What Can Possibly Go Wrong?

  • We are in the final inning of an economic recovery
  • It would be unusual if bank account balances did not look better
  • FICO will loosening credit standards on top of collections updates

Late Cycle Lunacy

The changes are not meant to weed out applicants. Rather, they are specifically designed to boost the number of approvals for credit cards, personal loans and other debt.

These kinds of changes are best made after market and recession bottoms. By all means give more credit to those who handled themselves well in times of stress.

This is more late-cycle lunacy.

Mike "Mish" Shedlock

Comments (25)
No. 1-16
Six000mileyear
Six000mileyear

The only "blemish" on my record is I don't use credit enough, so my score has room to "improve". Of course everyone who reads this blog sees the irony / racket in the situation: one needs to take on more risk unnecessarily to be deemed worthy of a perfect score.

tz1
tz1

I've closed two credit cards, so my "ratio" dropped so my credit score got worse although in one case I rarely used it, and not at all in the prior 3 years, and in the others, because the annoying customer service drove me to just use a second card (they had different cashback offers).

Death by algorithm. It used to be your banker knew you and if you were a good risk. Now it is all AI, Algorithm, scoring, or whatever which correlates until it is gamed.

bowwow
bowwow

The sales potential from high risk credit customers is appealing to companies. The best way to accept more credit and take the least amount of incremental risk is to lower the score cutoff criteria. So, I'm a bit surprised if they really expect to get anywhere by using the Ultra score to override the regular FICO score. There might be an application for those with no credit file or for customers with files that have too little information to produce a score that differentiates the risk.

Carl_R
Carl_R

It has always seemed strange to me that a person with money in the bank, and no debt, would be considered a poor credit risk, simply because he has little or no payment history. These people should have higher credit ratings than the current system, so this seems like a reasonable change to me. Note, however, that unlike what Mish is warning, it probably won't make a substantial change in the total lending picture. Why not? Precisely because these people have a low rating because they never borrow, and raising their rating isn't going to change that; they still will do things as they always have. They will keep money in the bank, and not borrow.

mark0f0
mark0f0

The 'hook' is that FICO is getting even more data, on transactions in cash accounts, than previous. Just as they might be using such data to create more products today to help lenders loosen credit, the additional data they're accessing may very well be used in the future to tighten credit.

For example, an individual who has an emergency fund and loses their job can probably forestall deterioration of their credit score for at least a few months, by reducing payments, by prioritizing payments, etc. Current models don't really "look" into a cash chequing account and analyze the transactions. At best, only a balance is report, if at all. But if FICO can see account transactions, for example, their algorithms will be able to 'see' very quickly after a layoff, that a paycheque is no longer arriving. And scoring derived from such can very quickly be re-calibrated to indicate significant credit stress ahead.

In short, during the 2008/2009 crisis, a lot of lenders were caught with their pants down because their reliance on FICO scoring which is a rather blunt instrument, was too easily manipulated, and quite frankly, way too slow to react to actual changes in circumstances. The first thing that many borrowers did when they realized that a new job wasn't going to be right around the corner was max out their cards simply to preserve liquidity. These efforts are aimed at avoiding such during the next round of credit crunch.

$SLIMSHADY1
$SLIMSHADY1

Do you think I would be able to get one

Sechel
Sechel

I naively assume Fair Isaacs has data going back two decades to prove their new algorithm is not allowing poorly under-written loans from now getting approved based on revised metric. I'll also assume banks and lenders didn't lobby for this change

FelixMish
FelixMish

If you want to loan out dough to more people, just lower your FICO cutoff. Is there some law preventing that? If so, why so?

Now, if this new metric is a more predictive metric, then, that's a completely different story. Nothing to do with loaning to more or fewer people.

KidHorn
KidHorn

There's a big difference between paying in cash and paying in credit. If you pay in cash and don't have the cash, you don't get the product or service. When paying in credit, you get the product or service up front and once the product and service is rendered, many don't see a reason to pay.

This whole thing is clearly a scam to make FICO scores look better when the debt is securitized.

mkestrel
mkestrel

This is obviously a blatant attempt to keep the debt party going into overtime. I suspect it is also a sign post we are not too far from the bitter end.

kram
kram

Not so Fair after all, dear Issac!

Sechel
Sechel

credit scoring in no way communicates capacity to repay. only thing worse is under-writing based on character.

RonJ
RonJ

"The new score, in the works for years, is FICO’s latest answer to lenders who have been clamoring for a way to boost loan approvals."

If lenders want to boost loan approvals, just check to see if the applicant is breathing. It worked so well during the housing bubble, when Greenspan took the lending standard to ZERO.

CautiousObserver
CautiousObserver

@mark0f0 said: "Just as they might be using such data to create more products today to help lenders loosen credit, the additional data they're accessing may very well be used in the future to tighten credit."

I think Mark is correct. Although the UltraFICO program is being touted as a way for underserved consumers to access credit, from the point of view of lenders it is probably aimed at improving visibility into the cash side of balance sheets so they can cut off credit earlier if they see warning signs.

Regarding the timing of the rollout, it is a pilot program. Lenders probably want to collect initial data to see how cash transactions relate to consumer repayment of credit during an economic contraction. As Mish points out, a cost of collecting this initial data may be that lenders have a little more consumer credit exposure during the next contraction than they otherwise would have, but for lenders that trade-off is probably a reasonable cost of doing business. What better time gain valuable data from a pilot program? Anyone who has ever dealt with a lender knows that they want to boost loan approval AND get paid (or they at least want enough time to pass any hot potatoes to someone else).

FYI: There seems to be a bug in the "edit" function for this site. If I make a post, sign out, clear browser history, and then sign in again shortly after to make a minor edit, the original post ends up being permanently deleted.

Grumblenose
Grumblenose

I don't understand why this would over all give MORE access to credit. Surely it would cut both ways, reducing the credit score of some people?

JL1
JL1

Just what the economy needs: More debt....NOT

On the plus side this should keep the economy going until 2020 so Trump should be getting re-elected but long term this just makes the eventual crash larger.


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