Here’s How the New UltraFICO Credit Rating Will Work
The biggest shift in three decades is in how FICO credit ratings are calculated next year.
Rather than relying primarily on a consumer’s credit history of payments, Fair Issac Corp. (issuer of FICO ratings) will consider “how consumers manage cash in their checking, savings and money market accounts,” according to the Wall Street Journal .
The so-called UltraFICO score is designed to improve consumers’ chances of approving credit cards and personal loans. Instead of strictly monitoring timely payments, FICO will also look at the person’s current current balance, the length of the check history, the frequency of transactions, and the history of overspending according to the Journal:
If the applicant’s traditional FICO score does not meet the requirements, the lender may offer to recalculate the score to reflect banking activities. Potential borrowers with at least a few hundred dollars in accounts, who have accounts for a while, who frequently transact and do not exceed credit, are likely to grow their ratings, according to FICO.
The change is intended to help those who do not have an extensive credit history. “Consumers with an average balance of at least $ 400 who have not used an overdraft in the previous three months are likely to receive support,” the WSJ said. The FICO spokesman added that some of the scores may decline. The FICO says the Ultra rating will “attract the low-income — the self-employed, millennials, immigrant entrepreneurs, migrants who save and send remittances,” and give people who “may have gone through financial difficulties but are recovering” a second chance.
But, according to Ted Rossman, industry analyst at CreditCards.com, “The possible unintended consequence of including bank balances would be an increased focus on income and assets,” says Rossman. “Historically, your FICO rating is influenced by how well you manage your money, not how much money you have.”
And while the changes are coming from FICO next year, it will likely take time to get them across to consumers. “The last major FICO update, FICO 9, came out in 2016, but the most common system used by lenders is still FICO 8,” says Rossman. “This means that things like medical debts, fees paid and tax liens still cause many consumers more harm than expected.”
But for those with no credit history or those who object, the new system can give them a boost.