Whether you’re applying for a mortgage, trying to open a new credit card, or financing a new vehicle, your credit scores will very likely play a role in the lender’s decision. And, there’s a chance that the score being used will be one of FICO’s scores.
FICO’s credit bureau scores have been commercially available since 1989. And, while they’re not the only type of credit score that matters, FICO scores are used by 90% of top lenders in the United States. The point being, when FICO announces that it is developing a new credit score, it’s certainly worth your time to pay attention.
Introducing UltraFICO, a New Credit Scoring Model
Much has changed in the world of consumer credit since lenders first began using FICO scores nearly 30 years ago. As a result, and to remain current and ensure its credit scores remain as predictive as possible, FICO updates its scoring models from time to time and periodically introduces newer scoring tools.
The newest credit score to be developed by the Fair Isaac Corporation is known as UltraFICO.
UltraFICO represents what I believe to be the first ever “opt-in” credit score. This means consumers can actually choose to use their personal data to calculate an UltraFICO score. For reference, consumers have no control over whether a garden variety FICO score or VantageScore credit score is calculated using their data.
Features of UltraFICO
Some details about UltraFICO are not yet known, but here’s what we do know so far:
- UltraFICO will be made commercially available sometime in 2019. The exact date is still to be determined.
- UltraFICO is only initially available through Experian whereas traditional FICO scores are available from Equifax and TransUnion as well.
- UltraFICO will consider information found outside of your Experian credit report. This represents a departure from the way FICO scores have worked since their inception.
- UltraFICO will consider information from your deposit accounts like checking, savings, money market, etc. Maintaining positive balances on these types of accounts will be helpful to your UltraFICO score. Overdrafts, unsurprisingly, will be problematic.
- You will have to provide a list of your deposit accounts and banks/credit unions as well as your login credentials so the deposit account information can be accessed and considered.
- For consumers with traditional FICO scores slightly below a lender’s cutoff threshold, positive deposit account data could make a difference between an approval or a denial.
While news of a credit score that uses alternative non-credit data is exciting, it’s important to understand the new score’s limitations as well. UltraFICO isn’t widely available to lenders yet, but even once it is, the new score won’t help everyone.
UltraFICO is Currently Only Available Through Experian
UltraFICO will only be available to lenders that use Experian as their source of credit reports. So, if you apply for an auto loan with a lender that uses TransUnion or Equifax credit reports, UltraFICO won’t do you any good.
Additionally, because UltraFICO is only slated to work with your Experian credit report — for now — it will not have a place in the mortgage market. Fannie Mae and Freddie Mac are the government-sponsored enterprises (GSEs) that set loan requirements followed by almost all mortgage lenders.
The GSEs require the use of credit reports and very old versions of FICO scores from all three of the credit reporting agencies.
In fact, even if UltraFICO were a three-bureau score, it couldn’t be used by most lenders in the mortgage space until the GSEs approved it. This restriction on the use of credit scores doesn’t exist in any other lending environment and, frankly, is a considerable disservice to mortgage borrowers.
Data Security Concerns Loom
You can’t talk about UltraFICO without bringing up data security. In 2018 alone, 828 data breaches exposing over 1.3 billion records were reported.
Now, none of those were FICO or Experian and those companies don’t have a reputation for data security laziness, but you are going to have to take a leap of faith when giving out the login credentials to your bank accounts.
If you choose to use UltraFICO, you’ll be handing over access to more of your personal information than is typical in a normal credit score calculation. In addition to your Experian credit report, UltraFICO will consider data from your deposit accounts.
This means you will have to disclose the username and password to your bank accounts and trust a third-party company called Finicity to keep your information safe.
Of course, these companies already have access to a massive amount of your sensitive data. Experian, for example, maintains credit files on more than 200 million consumers. It’s not as if the companies involved with UltraFICO have no experience with managing large sets of sensitive information.
What Do Lenders Think?
FICO is one of the most respected names in risk assessment. The company builds models that help lenders reduce their exposure to financial loss. When FICO releases a new credit score, the lending world takes notice.
However, noticing a model or even being intrigued by its possibilities isn’t the same as a lender choosing to adopt the score for underwriting purposes.
Think of this as a new operating system update for your PC or Mac. Just because a new version is available doesn’t mean you will opt to pay for it or go through the hassle of updating right away.
Converting to a newer credit score can be time-consuming and expensive for lenders. It takes several years for the market to adopt the latest and greatest new credit scoring model to the point where it achieves a critical mass of users.
According to FICO, FICO Score 8 is currently the most widely used scoring model at Equifax, TransUnion, and Experian, despite there being a FICO Score 9. FICO Score 8 became available at all three credit reporting agencies in July of 2009.
Change can be even slower in certain lending environments. While FICO 8 is commonly used in credit card approval decisions and auto lending, the mortgage industry still uses versions of FICO that are approaching 20 years old.
This failure to adopt newer credit scoring models in the mortgage world is due to the aforementioned restrictions imposed by Fannie Mae and Freddie Mac as a result of the Federal Housing Finance Agency or FHFA. Only time will tell whether the lending world ultimately embraces the new UltraFICO score with its alternative data possibilities.