CREDIT SCORING
New Credit Scoring Model Could Help
Millions
by: James H. Dimmitt
Mark and Beth, a young married couple in their twenties,
established a goal to buy a home within the first three
years of their marriage before starting a family. They
budgeted and used their money wisely in order to save
for the down payment. Whenever they purchased something
they always paid cash - no credit cards for them. Why
waste money by paying interest to a credit card company
?
Within two years they’d reached their savings goal
and began house hunting. They found their “American
Dream” home in a new community with lots of amenities
that seemed perfect for their soon-to-be family. They
were elated that their years of saving were about to finally
payoff.
But, they ran into a big problem when they went shopping
for a mortgage. Even though they had enough income to
make mortgage payments and enough money saved to afford
the down payment, they had no credit history. Lenders
had no FICO score to evaluate their creditworthiness in
order to offer them a loan. Fair Isaacs Co. established
a credit scoring system in the 1980’s and since then
FICO scores have been used to determine if someone will
qualify for a mortgage and the interest rate they would
pay.
Over 50 million U.S. adults fall into the same category
- they have either too little credit history or no credit
history at all. But now thanks to a new FICO formula,
called FICO Expansion Score, lenders will now have opportunities
to extend credit to consumers based on non-traditional
credit data that are excluded from credit bureau reports.
FICO Expansion will consider a wide range of financial
transactions including payment activities such as rental
payments, deposit accounts, payday loans, book or CD club
payment plans, and retail lay-away plans.
Who stands to benefit from this new scoring model? Anyone
who makes little use of banks, credit cards, or checking
accounts. The “credit underserved” claims Fair
Isaac Co, which includes young adults, low-income consumers,
widows or divorcees, and immigrants.
And while those in the credit card and mortgage industry
see this new scoring model as a potential benefit, those
in the credit counseling sector foresee potential problems.
Fair Isaac CEO Tom Grudnowski is excited about his company’s
new credit-scoring resource. “This extension of the
FICO score gives lenders and other businesses another
powerful tool ..., while expanding service options for
consumers who have missed out on opportunities simply
because they lack a traditional credit history.”
The opposition, namely debt and credit counselors, see
both the good and the bad. Some consumers will benefit
by qualifying for less costly credit arrangements. However,
others could fall prey to becoming overextended unless
they also receive some basic credit and debt education.
Tom Hicks, a credit counselor in Chicago, worries that
“with the average American household owing $8,000.00
in credit debt, this could open the door to others finding
themselves unable to handle credit properly. Ultimately
the burden lies with the consumer,” he says.
Fair Isaac Co. estimates that at least half of those without
traditional credit profiles will benefit from this new
scoring method.
About The Author
© 2004, http://www.yourfreecreditreportnow.com
Author: James H. Dimmitt
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