New FICO credit score

Some time next year FICO will roll out a new form of evaluating your credit score. It has both it’s pros and cons, it should help out those with no credit (which is some 60 million Americans) and those with poor credit (which is some 80 million Americans) this article should answer the most frequently asked questions on the new FICO score.

What’s new about the FICO score?

If you’re rebuilding credit, have poor credit, or have no credit and continuously get denied a credit card or loan, the lender (most likely a bank) can opt for you to send your transactions/activity from your checking, savings, and money market accounts.

FICO will continue to use the same 300 - 850 point system.

Experian, one of the three main credit bureaus, will gather said transactions and will evaluate your credit worthiness, almost like giving a second chance.

What are they evaluating in the transactions?

Experian will look at your bank account transactions and grade you in four main categories

  • Having more than $400 + in the bank

  • Having more deposits than outflows

  • Not having an overdraft in the past three months

  • Paying a monthly bill (rent, phone, utilities, etc.)

I wouldn’t like to opt for this since Experian will see all these Uber eats transactions and just be so conflicted with the amount of times I order food.

Uber eats transactions.PNG

For those without an Uber eats habit, having a check mark in all 4 categories could mean a point boost of 10 - 30 and that is a lot.

Pros and cons. Winners and losers

Pros

I know plenty of friends and colleagues relative to my age who don’t have any credit to their name and with the new ultra FICO scoring system and with a healthy bank account, they can finally be given their first line of credit. This isn’t also applicable to young people either, but as well immigrants who just migrated to the country but have not gotten the chance to build credit, as well as any American who have never had a line of credit.

Folks who already have credit and a healthy bank account can now get a bigger point boost from this, allowing them to have access to larger loans at smaller interest rates.

This overall allows banks to expand into a market that has been neglected financing or lines of credit.

Cons

There is a reason as to why FICO deems 80 million of Americans with poor credit, they all misused their lines of credit previously. Granted, every individual has a different circumstance and story as to why they gave them a poor credit rating. I’m talking about the folks who mismanaged it in the first place and who have not learned their lesson. Giving them a point boost to obtain more lines of credit could potentially mean higher defaults.

Granting credit to those who never managed credit is a risky bet on behalf of the lender.

This doesn’t weed out or have stricter regulations on those who mismanaged their credit, it only grants credit to a broader market. 

The winners of the new FICO score

Banks and credit card companies; as they lend out more to a larger and newer market and further expand lending to people with good credit, this is recipe for them to profit.

Consumers; with more borrowed money, you can buy more shit you don’t need OR fund a business.  

Businesses; with more folks getting access to credit, individuals now have more spending power that can go to goods and services.  

The losers of the new FICO score

Low income families who already live paycheck to paycheck won’t benefit much from the new FICO score as they already fail to have an average of $400 + in the bank, low income families are also prone to overdrafting a few times in a year.

The macro economy, as more folks will be spending, inflation will pick up, forcing the federal reserve to hike interest rates, making it more expensive to borrow, and slowing economic stimulation. (But you probably don’t care about that.)

Lenders: as this new market is a potential for them to make a good profit, it also means that there are risks involved lending money to those who have never had credit or who have poor credit. Defaults are bound to increase in the future.

Deja vu

Everyone recalls NINJA loans? (No Income No Job or Assets.) They were popular among people who wanted to purchase homes back in 2007, who also most likely did not have any credit history. Not really ideal since the lenders are going to need the money back soon and giving it to a borrower who has no job or a collateral is a risky bet. Does everyone recall what happened in 2008 - 2009 to those borrowers? Hint: They defaulted or lost their home. Certain lenders went belly up or received a bail out from the government. Overall, an unappealing image for the U.S economy at the time.

This isn’t any different, while there are some requirements this time around, it’s the bare minimum and easy to meet. Regardless, the folks who have never managed credit before will be granted a line of credit and there are sure going to be a handful of folks who default on their debts. In a sense, this doesn’t sit too right with me, but we’ll see what happens later on in the future.

I’d like to hear from you, what are your thoughts on the new ultra FICO score? How will this affect the overall economy? Will you get a decent point boost from this new FICO score?