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.
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