New Credit Report Scores Target Undeserved Consumers |
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Consumers who have been turned down for credit or who've paid a higher interest rate because a scant credit history gave them a low credit report score have another shot now at more favorable terms. Fair Isaac Co., creator and owner of the FICO score widely used in the mortgage, auto loan and credit card industry, has created a new credit report score designed to predict credit risk for individuals with little or no credit history. The new FICO expansion credit report score draws on information in an array of small credit reporting agencies outside the realm of the three major credit bureaus. The new credit report score draws on data from industries such as payday loan companies, rent-to-own stores and banking organizations that share information about people who abuse overdraft protection on checking accounts. The company's market research, which is confirmed by others in the credit industry, indicates that while about 160 million consumers have enough information on file to generate a valid FICO score, as many as another 50 million do not. The consumers who might get a break with the new credit report score include recent immigrants to the United States (whose good payment histories from their home countries don't transfer to the U.S. credit reporting system), college students, new divorcees and widows, those with low incomes, and people whose cultures don't trust financial institutions or large national organizations. A credit report score is a three-digit number used to predict how risky it is to extend credit to an individual. A statistical algorithm that compares a person's credit history to those of millions of other consumers, it uses a scale from 300 to 850. Most people will have scores between 600 and 800--if there's enough information in the credit bureau records to generate a credit report score. That information comes from such places as mortgage companies, credit card issuers and auto financing companies. Without sufficient information at a credit bureau to generate a credit report score, or so little information that it produces a very low credit report score, many consumers either are turned down for credit or pay more for it. They might have never paid their rent or their utilities late, but those companies generally don't report payment data to the credit bureaus. Many times, the need to gather a year's worth of rent receipts or utility payments discourages borrowers from even trying to get a mortgage. To have (Fair Isaac) converted that information to a credit report score is a real help to the industry. If it operates the way it should, it should be a real win-win. The new credit report score won't help individuals who have a low score because they've messed up their credit by paying their bills late or walking away from them. This is the great fix for those who have charge-offs or a poor payment history. According to financial experts, it rewards people who weren't in the credit market, or preferred not to be in the credit market. Believe it or not, some people don't like credit. Mortgage lenders say the prospect of having another tool available to simplify the underwriting process would be a welcome change to the current process of collecting data by hand. Experts says that if this is effective and performs as well as the regular credit report score, it will lower the cost of credit and put more people in houses, making this type of loan more fundable and improve the pricing. According to credit scoring accuracy study for the Consumer Federation of America, while it's encouraging to see an opportunity for millions of consumers to get greater access to credit, many industries from which the data is collected have a history of only tracking customers who don't pay on time. A great strength of mainstream credit industry in this country is if you do things right, you get rewarded with good credit report score. It is difficult to get positive information because it takes more energy to collect, file and report. Plus, competitors don't want to give away information on their good customers. But Fair Isaac's data sources do provide both positive and negative credit information, and they have confidence that the data is strong enough to provide a valid credit report score. |
