The UltraFICO Score, a refined consumer credit rating product developed by Fair Isaac Corp. Wants to test in early 2019, promise To help ensure that more people are given loans who demonstrate “responsible financial conduct” but are excluded from mainstream lending because they are neglected by traditional scoring mechanisms. It also promises to help individuals improve their current FICO scores, which have long been the benchmark for determining an individual’s creditworthiness.
While the UltraFICO would certainly expand financial inclusion, consumers need to be wary of obscure loan offers and learn exactly how to protect their data, according to experts from Wharton and the University of Utah.
Essentially, the UltraFICO score is calculated using people’s banking transaction data by examining their financial behavior based on the activities on their checking, savings and money market accounts. Fair Isaac Corp. is working with Murray, Utah-based credit bureau Experian and data aggregation company Finicity to bring the new offering to market.
“The name of the game here is a more accurate risk prediction,” said Wharton real estate professor Benjamin Keyswho is also a faculty research fellow at the National Bureau of Economic Research. The UltraFICO score would also take into account aspects of a consumer’s financial conduct that were previously tracked, such as: B. How long he has had credit cards and his payment history.
“You can take some people who previously looked bad credit from a lender’s point of view and move them to the other category thanks to that extra information,” Keys said. The Ultra FICO Score is essentially trying to attract more people who “have a problem with thin credit files” or don’t have a lot of credit history, he noted. In theory, the new score provides a well-rounded view of a consumer’s credit history – their credit history, income, and wealth.
“There are some privacy concerns and the potential to encourage some risky forms of more expensive lending.”–Christoph Peterson
“Individuals who may have overdrawn their checking accounts or have very low or spotty passbooks on their savings accounts could potentially be negatively affected by this scoring model,” said Christopher Peterson, Professor of Law at the University of Utah’s Quinney College of Law. Previously, he was a special advisor in the Office of the Director of the US Consumer Financial Protection Bureau. Although the UltraFICO Score is advertised as “this wonderful new thing, it’s complicated,” he added. “For some people, this will make it clearer that they are not creditworthy. I also think there are some privacy concerns and the potential to encourage some risky forms of more expensive lending. “
Keys and Peterson discussed the promise and potential pitfalls of the UltraFICO score on the Knowledge @ Wharton radio broadcast on SiriusXM.
Pressure from lenders
Keys said two factors drove FICO as a company to adopt the UltraFICO score. One of these is pressure from the credit industry to “expand the credit box,” especially when the average FICO score to qualify for a mortgage loan has increased from about 700 in 2000-2001 to about 750 now, he said. “The pendulum in lending, especially in the mortgage sector, widened from extremely loose to fairly tight in the mid-2000s.”
The second factor is competition from the credit reporting agencies who have actively promoted their VantageScore product to lenders, Keys said. He added that there had been a move to expand lending, in part because defaults on most types of credit had decreased, with the exception of student loans and subprime car loans.
“The dream lenders dream is that they want to increase lending without taking more risks,” said Keys. “The idea that you can just boost lending without taking more risk is very unlikely.” He wondered how valuable the new information FICO is trying to gather will be in terms of its “predictive power”.
Under the radar
According to FICO, the UltraFICO score would “attract the under-banks – self-employed, millennials, entrepreneurs with a migrant background, savers with a migrant background and referrers …”. It would also expand the credit base by making consumer credit information more visible and giving consumers who may have gotten into financial trouble a second chance, the company said. “It is one of the biggest changes in credit reporting and the FICO scoring system, the foundation of most consumer credit decisions in the US since the 1990s,” a Wall Street Journal report called.
Certainly, the UltraFICO score could help “a few million people” achieve credit ratings similar to the traditional FICO score, Peterson said. This includes people who do not have credit cards or mortgage loans that are traditionally tracked for credit assessments but have bank accounts, he added.
At the same time, low credit consumers have access to credit such as payday loans, although these can be very expensive, Peterson said. “There are still close to 20,000 payday lenders in storefronts across the country and many online payday lenders offering loans with average interest rates of 400% or more,” he added. Some states, like Pennsylvania, set an interest rate that excludes some of the highest cost lenders.
While some consumers may look like “desirable credit risk,” others may have availed of alternative financial services like payday loans or pawn shops, Peterson said. “Some of the people who will be included in the credit reporting system through this new scoring system will look positive from the point of view of lenders, but some of them will look negative,” he warned.
“The problem is not just people’s creditworthiness, but whether we tolerate credit that is counterproductive to society,” said Peterson. “One of the concerns I have about the UltraFICO score is how installment lending companies, payday lenders, and other alternative financial services providers will use this new score to get into the pockets of people who may not be helped as much by higher cost loans . “
“The lenders dream here is to increase lending without taking more risks.”–Benjamin Keys
Data and identity theft
Peterson expressed concerns about whether the UltraFICO score would collect more financial data from consumers than would be desirable. “That’s just another one [way to gather] more data about us, including how much money we have in our bank accounts, what our payment habits are, our spending history and whether or not we overdraw our checking accounts, ”he said. “It’s just more information being sucked into the data brokerage industries that sell that information to interested parties.” He was also concerned about whether the new credit rating product would increase the risk of identity theft. He pointed out that hiring decisions could also be influenced by the UltraFICO score, adding that it was “legal and permissible” for employers to do credit checks before hiring someone.
Unlike other markets, historically consumers have had no say in the type of credit information collected about them, Peterson noted. The UltraFICO score is advertised as one that would get consumer consent. “But I’m a bit skeptical that consumers will have a solid level of voluntariness here,” he said. “I wonder if this isn’t something that slips onto a form or model contract that people don’t read.”
Individuals have the right to check their creditworthiness under the Fair Credit Reporting Act, but Peterson is unsure if it provides the necessary protection. “Just because you have the right to be audited doesn’t mean you have the time, background, or system understanding to do this successfully.”
For consumers, the UltraFICO is another aspect of their financial life that they must grapple with in order to “manage theirs”. [financial] Shout, “remarked Peterson. How is the information presented? How is consumer access to the data ensured? How are consumers informed so they can review and fix potential problems or correct information? These problems are not insurmountable, Peterson said, but the UltraFICO “needs to be understood in the context of all the other things we should already be doing to keep our finances under control”.
Keys urged consumers to regularly check their creditworthiness, which is freely available once a year on the U.S. Federal Trade Commission website, or through the websites of the three credit reporting agencies – Experian, TransUnion, and Equifax. The three offices also provide the so-called VantageScore via a joint venture.