Mark and Beth, a young married couple in their twenties,
established a goal to buy a home within the first three years
of their marriage before starting a family. They budgeted and
used their money wisely in order to save for the down payment.
Whenever they purchased something they always paid cash - no
credit cards for them. Why waste money by paying interest to a
credit card company?
Within two years they'd reached their savings goal and began
house hunting. They found their "American Dream" home in a new
community with lots of amenities that seemed perfect for their
soon-to-be family. They were elated that their years of saving
were about to finally payoff.
But, they ran into a big problem when they went shopping for a
mortgage. Even though they had enough income to make mortgage
payments and enough money saved to afford the down payment, they
had no credit history. Lenders had no FICO score to evaluate
their creditworthiness in order to offer them a loan. Fair
Isaacs Co. established a credit scoring system in the 1980's
and since then FICO scores have been used to determine if
someone will qualify for a mortgage and the interest rate they
would pay.
Over 50 million U.S. adults fall into the same category - they
have either too little credit history or no credit history at
all. But now thanks to a new FICO formula, called FICO
Expansion Score, lenders will now have opportunities to extend
credit to consumers based on non-traditional credit data that
are excluded from credit bureau reports.
FICO Expansion will consider a wide range of financial
transactions including payment activities such as rental
payments, deposit accounts, payday loans, book or CD club
payment plans, and retail lay-away plans.
Who stands to benefit from this new scoring model? Anyone who
makes little use of banks, credit cards, or checking accounts.
The "credit underserved" claims Fair Isaac Co, which includes
young adults, low-income consumers, widows or divorcees, and
immigrants. And while those in the credit card and mortgage
industry see this new scoring model as a potential benefit,
those in the credit counseling sector foresee potential
problems.
Fair Isaac CEO Tom Grudnowski is excited about his company's
new credit-scoring resource. "This extension of the FICO score
gives lenders and other businesses another powerful tool ...,
while expanding service options for consumers who have missed
out on opportunities simply because they lack a traditional
credit history."
The opposition, namely debt and credit counselors, see both the
good and the bad. Some consumers will benefit by qualifying for
less costly credit arrangements. However, others could fall
prey to becoming overextended unless they also receive some
basic credit and debt education.
Tom Hicks, a credit counselor in Chicago, worries that "with
the average American household owing $8,000.00 in credit debt,
this could open the door to others finding themselves unable to
handle credit properly. Ultimately the burden lies with the
consumer," he says.
Fair Isaac Co. estimates that at least half of those without
traditional credit profiles will benefit from this new scoring
method.
