Do you know your credit score? Maybe the better question to ask is, which credit score do you know?
If you have a significant credit history, you probably have a FICO Score. If you’ve applied for a credit card or personal loan recently, you probably know what your FICO Score is too. But your FICO Score isn’t the only credit score prospective lenders, landlords, and employers may use when determining your credit risk.
Fair Isaac Corporation, the company behind the FICO Score, has dozens of credit scoring models, some of which apply only to very specific industries or credit types. And let’s not get started on all the non-FICO credit scores out there, like VantageScore, a popular joint venture by the “big three” credit reporting bureaus, Equifax, Experian, and TransUnion.
None of these scores is perfect. One common deficiency is a tendency to overlook solvent, fiscally responsible consumers without significant credit histories. Maintaining a positive bank account balance and making consistent, timely bill payments might not be sufficient to qualify you for a FICO Score or VantageScore. That could put you at a significant disadvantage when the time comes to apply for a credit card, mortgage, or personal loan.
That’s what makes UltraFICO, a new credit model from Fair Isaac, so intriguing. UltraFICO is still in development, with the rollout of a limited-scope pilot program expected in early 2019. When it’s fully up and running, it could make a meaningful difference in the lives of millions of American consumers who don’t have a FICO Score.
Here’s a closer look at what UltraFICO is, how it works, its potential benefits, and its likely limitations.
What Is UltraFICO?
UltraFICO is a three-way joint venture from FICO, credit reporting bureau Experian, and Finicity, a fintech company specializing in financial data and decision-making tools.
According to a press release announcing the new model’s launch, UltraFICO “leverages account aggregation technology and distribution capability from Experian and Finicity to help consumers improve access to credit by tapping into consumer-contributed data, such as checking, savings and money market account data, that reflects responsible financial management activity.”
In plain English, UltraFICO incorporates non-credit information into a proprietary risk scoring model built for consumers who:
- Have impaired or borderline credit, as indicated by traditional FICO Scores in the upper 500s to low 600s
- Have limited credit history, as indicated by sporadic credit utilization
- Are trying to rebuild their credit after bankruptcy or other significant adverse credit events
According to FICO estimates, 79 million Americans have subprime (under 680) FICO Scores, and 53 million are “unscorable” under the standard FICO model due to limited data availability. Not all subprime and “unscorable” consumers stand to benefit from UltraFICO, however. FICO’s website indicates that over 15 million consumers without FICO Scores could receive an UltraFICO Score.
How UltraFICO Works
UltraFICO is an opt-in credit model, so you’ll need to provide login information for any bank accounts you wish FICO to consider. The process is comparable to linking your external financial accounts to a cloud-based budgeting program:
- Search for your financial institution in the database or manually enter its name if you can’t find it
- Enter your login credentials, including your PIN (if applicable)
- Confirm that you own and control each retrieved account
From that point forward, the system incorporates information in your accounts into a risk scoring model that also uses credit information from Experian. UltraFICO looks favorably on:
- Higher average account age
- Consistent account use
- Positive balance maintenance over a period of months (no overdrafts)
- Evidence of savings
- Regular, timely non-debt bill payments
For consumers with borderline credit, the goal is not to replace an existing FICO Score. Instead, it’s to supplement the credit information that goes into building a FICO Score and potentially improve that score above a baseline that doesn’t incorporate UltraFICO. According to FICO, 70% of consumers who use their linked financial accounts responsibly could see FICO Score improvement with UltraFICO. FICO defines “responsibly” as maintaining $400 in average savings and avoiding overdrafts for three months.
For “unscorable” consumers without an existing FICO Score, their non-credit information forms the basis of a new UltraFICO Score. This score is administered through Experian, and the experience of pulling an UltraFICO Score during the credit application process is no different from the consumer’s perspective than pulling a standard FICO Score or any other score.
Beginning in early 2019, the UltraFICO Score will be available at a select group of lenders during a pilot phase of undetermined length. If you feel your credit profile makes you a good fit for UltraFICO, you can sign up for updates at the UltraFICO website. If your lender is part of the pilot program, you may be invited to apply directly once the program is rolling.
FICO indicates that UltraFICO will be more widely available for lenders sometime in mid-2019, but this time frame is subject to change based on the results of the pilot program.
Potential Benefits of UltraFICO
Potential benefits of UltraFICO and the UltraFICO Score for consumers include:
1. It’s Opt-In
UltraFICO is an opt-in program. You consent to and have full control over disclosures of sensitive personal information, including your bank account login credentials and PINs. If you don’t want to provide this information or consent to the use of your bank account balances, transaction history, and overdraft activity, you don’t have to.
Most credit scores and models aren’t opt-in. While credit reporting bureaus and other financial institutions take pains to keep consumer data safe, they’re not all-powerful. In 2017, for instance, Equifax reported a catastrophic breach that exposed some 143 million consumers’ personal information, according to the Federal Trade Commission. It was widely seen as a massive violation of Equifax’s public trust, in no small part because consumers had little say over what the bureau did with their financial data and personal identification information.
2. It Incentivizes Good Financial Habits
UltraFICO’s reliance on non-credit data incentivizes smart money management. In October 2018, The San Diego Union-Tribune asked more than a dozen Southern California finance and employment experts to share their opinions about UltraFICO. Multiple respondents praised UltraFICO’s expansive risk model for its behavioral engineering potential.
As Alan Gin, associate professor of economics at the University of San Diego, said, “The UltraFICO score would give a better indication of an individual’s financial circumstances. Management of debt, which the traditional FICO score measures, is important. Having money and being able to manage it is also important. [UltraFICO] will benefit those who are trying to recover after personal financial crisis, as well as those who are just starting out and have little credit history.”
An easy way to piggyback off UltraFICO’s savings incentive is to set up an automatic savings account and link it to your UltraFICO account. As your balance grows, your UltraFICO Score should improve, all other things being equal.
3. It Expands Access to Credit for Younger Consumers
College students and recent graduates are far more likely to have sparse, sporadic, or nonexistent credit histories. Not all young people qualify for student credit cards. Plenty of students who finance post-secondary education with student loans rely exclusively on parent loans that do nothing for their own credit profiles. And many parents do too little to build credit for their kids. By weighing non-credit factors, UltraFICO addresses the chicken-or-egg problem that stymies young consumers’ efforts to build credit.
4. It Expands Access to Credit for Low- and Middle-Income Consumers
The credit score status quo disadvantages consumers of all ages, but those at the lower rungs of the economic ladder face particularly acute challenges. When you live paycheck to paycheck, using a credit card only makes matters worse, as do predatory lenders such as payday loan providers. UltraFICO provides a way out, at least in theory: Maintain a stable bank account balance and pay your bills on time, and you’ll secure a toehold on the credit score ladder.
5. It Supports Quicker Recovery From Adverse Credit Events
UltraFICO does not provide immediate relief after adverse credit events, but neither does any other credit scoring model or credit repair tool. Still, UltraFICO’s reliance on non-credit factors offers consumers a head start on rebuilding their credit, compared to scoring models that rely solely on traditional credit factors. While a delinquency or discharged bankruptcy might temporarily render you undesirable to mainstream lenders, it might not affect your account holder status at the local bank or credit union.
Potential Limitations & Drawbacks of UltraFICO
These are just some of the potential limitations and unintended consequences of UltraFICO.
1. It May Penalize Consumers With Irregular Incomes
UltraFICO’s preference for stable, positive bank account balances and regular bill payments may disadvantage consumers with irregular incomes and unpredictable cash flows, such as solopreneurs and freelancers. If your bank account balance fluctuates wildly from month to month, you may want to stick with a traditional credit scoring model.
2. Information Sharing Raises Privacy & Security Concerns
A majority of the experts surveyed by the San Diego Union-Tribune were cautiously optimistic about UltraFICO. Among those with mixed or negative reactions, information sharing was a top concern.
If the Equifax breach taught us anything, it’s that the pillars of America’s consumer credit industry are not immune from hacking and cybercrime. The best way to limit your exposure is to opt out of – or, in this case, not opt into – data sharing arrangements when you have the opportunity.
3. It’s Not Appropriate for Consumers With Prime Credit
UltraFICO is not appropriate for consumers with prime credit. If your FICO score is above 680, you’re not likely to be invited to participate in the UltraFICO pilot program, and you probably won’t benefit from UltraFICO once the model is widely available. In fact, if you’re an independent professional with good credit and an unpredictable cash flow, UltraFICO could be a net negative for you.
4. It May Incentivize Risky Borrowing & Lending
Multiple experts surveyed by the San Diego Union-Tribune worried that UltraFICO could incentivize risky borrowing and lending. Jamie Moraga, president of San Diego-based IntelliSolutions, wondered whether banks saw UltraFICO merely as a means of expanding the pool of available borrowers and warned this could become “a slippery slope.” Expanded access to credit is a good thing, it’s true, but no one is entitled to a loan.
5. It May Reduce Overall Loan Quality & Raise Systemic Risk
More borrowers with impaired and borderline credit entering the market means lower overall loan quality and higher systemic risk. The pitfalls of lenient underwriting were on full display during the late 2000s housing market collapse, when the chickens hatched during years of aggressive subprime mortgage lending came home to roost.
The “subprime disaster” became a widespread economic calamity, precipitating the worst economic recession since the Great Depression. A single credit risk model is unlikely to wreak such havoc in isolation. However, as part of lenders’ broader quest for yield in an aging economic cycle, it could play a destabilizing role.
6. It Does Little to Address Other Weaknesses of the Credit Scoring System
UltraFICO may raise borderline credit scores over time, but it does little to address fundamental credit scoring weaknesses that disadvantage consumers in the here and now. It offers no correction for countless consumers who, justifiably or not, believe their low scores result from a reporting error. A single missed payment can have a significant impact on your credit score, for instance.
Disputing credit report items is time-consuming, daunting, and not always guaranteed to work. Many consumers live with the consequences of bad credit rather than enduring the process, if they even know it’s available to them. A credit scoring model that integrates dispute resolution into its algorithm would help address this.
UltraFICO is a breath of fresh air in an industry that could use it. Though this new credit risk modeling framework isn’t for everyone, it stands to benefit millions of consumers who’ve thus far been ignored or underserved by standard underwriting practices.
If your credit isn’t quite where you’d like it to be, it’s worth it to learn more about UltraFICO and, if you like what you see, to sign up for updates about the rollout. Just don’t opt into any information-sharing arrangements without considering all the pros and cons.
Do you plan to sign up for the UltraFICO pilot program? Why or why not?