Writer: Eric Bank
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
FICO and Plaid have come out with an evolution of their UltraFICO Score. It takes FICO’s file information and merges it with information directly related to cash flow provided by 12,000 banks and credit unions.
What lenders want is a way to quickly determine whether their borrowers are at risk before it shows up on their credit file as a late payment.
This is important because many subprime borrowers live paycheck to paycheck. Their credit file may not show trouble until it is too late. Lenders need warnings faster, and cash-flow data shows danger signs early.
In addition, it gives lenders information about steady habits often missing from credit files. Many thin-file customers have a hard time getting approved, even when they budget well.
Subprime lenders are seeing more missed payments. Household cash levels swing more from month to month. The swings increase losses. Lenders feel the pressure quickly. They want tools that let them see early problems. They also want help setting loan prices.
Cash-flow scoring provides lenders with immediate signals. These include shrinking balances, skipped bills, rising spending, as well as late utility payments. It also shows positive signs, including steady deposits, on-time bill payments, and even income patterns.
Cash-Flow Scoring Advantages
The new UltraFICO Score lines up with the classic FICO model. Lenders can plug it into their current systems without extensive testing cycles.
Cash-flow scoring helps lenders see things not shown in credit files, including account shortages before a missed payment. In addition, it shows increasing use of risky quick loans. Cash-flow data spotlights these details rapidly.
Plaid powers the real-time view. The score is delivered through Plaid Check. The data is compliant with FCRA rules. Lenders will have real-time cash information without the compliance headaches from raw bank data.
The model helps decrease mistakes. Traditional scores show past errors, and cash-flow data shows current habits. This combination helps lenders spot risk early as well as make safer calls.
What It Means for Subprime Lenders
Subprime lenders deal with higher rollover rates and first-payment defaults. They need to know whether a borrower can keep up. Cash-flow scoring has real income and spending information. It spotlights problems such as sharp account shortages and late utility bills early.
Subprime customers very often have solid earnings records. Most will pay bills on time. Their cash habits look strong even when their credit files look weak. The new score furnishes these good indicators. It fills lenders with more confidence.
Cash-flow scoring can also help lenders assign credit lines. Lenders can size credit lines based on the current money level. They will see risky spending behavior pretty quickly.
This approach is important during periods of household financial stress. It differs from Plaid LendScore and other stand-alone models. To the contrary — the new model will be able to intermix cash-flow information with the popular FICO scoring scale. Lenders will not need to replace their current risk models.
Cash-flow data helps lenders see money problems early, including things such as rent deadlines and BNPL balances.
Bottom Line
The new UltraFICO Score is a mix of credit history and real-time cash behavior. It helps lenders see trouble early. In addition, it helps lenders approve more customers who handle money responsibly. Subprime lenders will have a more powerful tool with which to make logical decisions.
