There is no mystery to the FICO score; the decision company has traditionally been transparent about what goes into the score, how the population distributes across the ranges, and the probability of default for the score ranges. The firm taught the world the meaning of “adaptive control.”
Something I have found from working in operational roles from acquisitions to recoveries, is that the score has a consistent meaning throughout the credit cycle. There is a connection to what a 720 FICO Score means in the underwriting function, as it progresses through normal account usage, what should happen if the account becomes delinquent, and how creditors should react if the cardholder writes off.
Credit card issuers often use the score from stem-to-stern. The logic also transports well into asset-backed securitizations, providing investors with a standard view of credit quality.
A 680 FICO Score means the same at Citi, Chase or Wells Fargo. There may be strategic differences in how each issuer uses the score, but from business to business, it is easy to discern risk and apply a strategy in a standard, reliable format.
Today’s read comes from the WSJ and talks about an enhancement to the current scoring process. It is not an update to the current model but rather the launch of a product called UltraFICO.
- Fair Isaac FICO +0.78 %, creator of the widely used FICO credit score, plans to roll out a new scoring system in early 2019 that factors in how consumers manage the cash in their checking, savings and money-market accounts.
- It is among the biggest shifts for credit reporting and the FICO scoring system, the bedrock of most consumer-lending decisions in the U.S. since the 1990s.
It will not likely diminish the scope of the current modeling system, which we see as evolutionary updates through versions such as FICO Bankcard Score 2-8, or the latest FICO Bankcard Score 9. Those models saw revisions as the economy and population changed. Weighted values changed for conditions such as isolated late payments, authorized users, credit line utilization and medical debt.
UltraFICO is designed to be more inclusive, which comes at a perfect time as issuers contend with low credit usage by Millennials. For example, the CARD Act of 2009 tightened the lending requirement for college students, which set the segment off with thinner credit files amidst piles of student loan debt.
- The UltraFICO Score, as it is called, isn’t meant to weed out applicants. Rather, it is designed to boost the number of approvals for credit cards, personal loans and other debt by taking into account a borrower’s history of cash transactions, which could indicate how likely they are to repay.
- The new score, in the works for years, is FICO’s latest answer to lenders who after years of mostly cautious lending are seeking ways to boost loan approvals.
Other segments will benefit from the change.
- The UltraFICO score will function as an appeal of sorts, likely boosting many applicants with less-than-ideal records.
- If an applicant’s traditional FICO score falls short, a lender can offer to have the score recalculated to reflect banking activity.
- Would-be borrowers with at least several hundred dollars in their accounts, who have had the accounts for a while and who transact frequently and don’t overdraw are likely to see their scores rise, FICO said.
Scoring attributes will include a view on how the consumer handles their banking relationships, such as the balance range and bad check usage.
UltraFICO will help lenders to cautiously dig deeper into credit files in an effort include more borrows, which comes at a good time, as lending begins to slow down in the U.S. market. For the firm that brought adaptive control to the credit market, this is an enhancement that will help credit card issuers and lenders follow the current market.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
