The new UltraFICO system could threaten the level playing field of credit score calculations
It’s a critical but largely unknown fact that the current FICO scoring system is income and asset blind. The system doesn’t look at how much you earn or how much you save. Instead, it looks at how you manage installment loans and credit cards—whether you make your payments on time and, for credit cards, whether your keep your balances low (below 30 percent of the credit limit on all your cards). The actual amount you borrow has nothing to do with your credit score.
Why is this so important? The FICO system levels the playing field for strong money managers who earn low wages. Under existing FICO rules, someone earning the minimum wage can have the same score as someone making six figures. Similarly, someone with limited or no savings can have the same credit score as someone with hefty savings.
The FICO credit score has been a measure of behavior, not wealth. It has helped low-wage workers establish prime or superprime scores and leverage those scores to rent quality apartments, qualify for mortgages, and access competitive rates on car loans, car insurance premiums, and credit cards.
But that could change with the new UltraFICO score, launching in 2019. For the first time, people who maintain average balances of $400 in checking, savings, or money market accounts may get a sizable credit score boost. Although the new score could expand access to credit for many Americans with healthy balances, that boost won’t come for people who don’t maintain such balances because they don’t make enough to save.
Who could be left out of the new system? Not an insignificant number, according the Federal Reserve Board. In 2016, 35 percent of Americans reported not having sufficient savings to cover a $400 emergency.
FICO could have made a different choice (and still can), one consistent with its history of scoring behavior and not wealth. It could have, for example, ignored balance information and instead examined other data available through partner Finicity—incidents of overdraft on the same accounts. That view of the data would enrich the FICO model by giving all consumers a new way to demonstrate outstanding money management and creditworthiness.
With this new FICO system, we could be starting down a slippery slope. UltraFICO is being piloted as an appeal, or a second chance, for people who have a low credit score under the current system. Consumers will first get a regular FICO score and then have the chance to get a boost through UltraFICO.
But a few years from now, will income and savings be baked into the basic FICO score? Will we lose one of the only means-blind indicators of financial acumen? For Americans of all income levels to have equal opportunity to credit and financial stability, we need to make sure that doesn’t happen.
11/12/18 update: FICO is a funder of Urban Institute and has supported research about access to credit.
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