NEW YORK – Some American consumers have a tough time qualifying for credit cards, mortgages and other loans because they don’t have a credit history – young people, recent immigrants, the newly divorced or widowed, and members of ethnic groups that traditionally haven’t used credit.
Last week, Fair Isaac Corp. of Minneapolis announced that it has developed a new credit score that will allow financial institutions to quickly evaluate the risk of lending to these groups.
Traditional credit scores are based on how well a consumer has handled credit cards, auto loans and mortgage payments; they are used to predict the likelihood that the consumer will default on a new loan.
The new FICO Expansion score will be based on “nontraditional sources of data” ranging from how well the consumers handled payday loans and retail payment plans to whether they used the overdraft protection on their checking accounts responsibly, Fair Isaac vice president Craig Dillon told a teleconference. He said that rent data could be included in the future.
Dillon said the goal was to make it easier for “the credit underserved market” to get loan products that now may be denied because financial institutions have no way to evaluate them.
These include an estimated 54 million Americans who have no reports on file with the major credit reporting agencies – Equifax, Experian and TransUnion – or have insufficient data in their files, he said.
Reaching this market is important for lenders, Dillon said, because “70 percent of growth in the next five years will come from the credit underserved market.”
Some 160 million Americans have full credit bureau reports that banks and other lenders can use to determine credit risk.
Dillon declined to name financial institutions that have agreed to begin using the new score but said that among those showing interest were mortgage and auto lenders as well as companies that sell wireless phones.