New Credit Score for Those without Credit

April 7, 2015

The traditional wisdom is that having any credit score is better than not having a score at all. Lacking a credit score makes it very difficult for a lender to calculate the risk of extending credit to a particular consumer. Consequently, a person with fair or even poor credit may be extended credit after evaluating all circumstances, while a person who pays her bills on-time and pays cash, but has no credit score, may be denied outright.

Some individuals fail to re-establish their credit history after bankruptcy. This is an obvious mistake when you compare a person with no credit history after bankruptcy with a person who has a year of rebuilding. When the individual with no credit is evaluated for a mortgage, a car loan, or even a new job, the last activity on his or her credit report is the bankruptcy discharge. The person who has rebuild his or her credit with have demonstrated responsible use of credit and on-time payments during the past 12 months.

Is this fair? Some banks are now saying, “No.”

Responding to bank requests, the Fair Isaacs Corp., producers of the popular “FICO” credit score, recently announced that it is developing a credit score for the estimated 53 million people who do not use credit cards, auto loans, house payments, etc. The new score will use alternative data including payment history on utility bills, cable bills and cell phone bills as well as other information in the public record such as the number of addresses the person has had in the recent past (an indicator of stability).

This new scoring system may have unexpected consequences, including the potential for more sources of negative information for consumers with “traditional” credit scores. The product “is largely a response to banks’ desire to boost lending volumes by increasing loan origination to borrowers who otherwise wouldn’t qualify, many of whom tend to be charged more for loans.”

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