New Credit Options for Those with Poor or No Credit History

Many unbanked and underbanked consumers don’t have credit cards and other traditional loans. Others operate on a cash-basis only and don’t carry debt at all. This happens despite there being plenty of financially responsible consumers who pay their bills on time. They just don’t have a traditional credit history, and they should be given the chance to participate in the financial mainstream.

To give a chance to millions of such Americans who have poor, little or no credit history, FICO (Fair Issac Corporation), in collaboration with LexisNexis and Equifax rolled out a new credit options program that will help many such people applying for credit cards, home and auto loans.

The program will be based on non-traditional criteria to identify creditworthy consumers. It will consider the payment history profile based on property records plus a person’s telephone and utility bills. This program will allow 12 of the largest credit card issuers in the U.S. to use alternative data to identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit. In contrast, the traditional FICO scores were mainly based on payment history, credit utilization, credit history, new credit and types of credit in the ratio of 35:30:15:10:10 respectively.

Data, such as property records, telecommunications and utility information, can reliably be used to score 15 million consumers who do not have enough credit data to generate FICO scores, according to The Wall Street Journal. By using alternative data from LexisNexis and Equifax, FICO will give card issuers a FICO score that complies with regulations which they can use to extend credit responsibly to millions of additional people. FICO’s focus is on expanding access to credit, not simply scoring more people. It will give a fair chance to those who are looking for their first traditional credit product.

This new FICO score is engineered to work alongside existing FICO scores. Credit card issuers, auto loan lenders and an increasing number of mortgage lenders frequently will approve borrowers who have a standard FICO score of more than 620. This suggests that the new score could help identify people who can handle debt responsibly but have previously been shut out of getting financing.

Over recent years, credit card issuers across the country have pushed their card offerings harder as they look for ways to nullify the negative impact of increased regulatory oversight and low interest rates on their card revenues. Credit card loans are arguably the most lucrative of the loans in a bank’s portfolio because of the high interest rates that they demand – something that more than makes up for the unsecured nature of this credit line. However, the intense competition among incumbents in the industry has seen them relaxing their lending criteria to be able to grow their customer base. This is evident from the fact that the FICO credit score threshold has been reduced from 650 to 620 by almost all these lenders in recent years.

The advantage of this new system is that it provides lenders a tool to identify the risk profile of potential customers. It can help lenders in two ways: firstly, the addition to their customer base will enhance the growth in their card balances. And secondly, as these customers are ineligible for cards and loans under the traditional credit score system, the lender can levy higher fees and interest rates on them. On the negative side, these customers are more likely to default on their loans. This will add to the lenders’ charge-off figures, and will also force them to incur higher personnel-related costs linked to collections and recoveries.