New FICO Score: Lenders Assess Credit Risks through Non-traditional Sources

By NEMAL PERERA
creditguard.org
Posted November 1st 2004, 9:00 PM EST

A FICO score is a credit score developed by Fair Isaac & Company, which determines the likelihood that credit users will pay off their bills. The credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance.

The FICO score is mainly derived from the length of credit history and having limited or no credit history can adversely affect your overall credit score. According to Fair Isaac & Company about 160 million consumers have sufficient information on file to generate a valid FICO score, while another 50 million consumers do not posses that ability.

The 50 million consumer segment mainly consists of young people and college students who have not yet established a credit history, new immigrants who are unable to transfer their credit history from their home country to the United States, divorcees and widows who were dependent on their former spouses credit history, and other wealthy consumers who have never needed credit in their lives. A high percentage of these consumers are financially responsible as most of us with good credit. They pay their rent on time, payoff their utility bill before the due date, and have never bounced a check in their life, but those companies and organizations generally do not report payment data/history to the credit bureaus. As a result, their FICO score will continue to remain low until they establish proper credit.

To serve this new vast market, Fair Isaac & Company has developed a new scoring system called the FICO Expansion score. The new score is compiled by using information from non-traditional sources such as, payday lenders, rent-to-own stores, book or CD clubs and companies that monitor (and blacklist) people who bounce checks.

Traditional FICO scores run from 300 to about 850, with higher scores signifying lower risks of payment defaults. The new FICO scores run in a slightly broader band, from 150 to about 950 in order to give lenders more variance and flexibility in deciding consumer creditworthiness.

According to FICO, the new scoring method has been well received by lenders since most are looking for tools that will help them better assess credit risk in this new untapped market. In the near future, FICO hopes that lenders will eventually go look up the FICO Expansion score if a traditional FICO score does not exist for a particular consumer.

The FICO Expansion score is only for consumers who have a low or limited credit history. Consumers who have ruined their credit due to negligent and personal reasons such as, late payments, missed payments, collections, and bankruptcies do not qualify to receive this new score.

The FICO Expansion score is currently available to lenders only. Lenders can purchase these scores directly from Fair Isaac's business and consumer portal Web site at www.myFICO.com/Business.

CreditGUARD of America, a non-profit credit counseling agency, is dedicated to helping residents get through this difficult time by providing full service credit counseling to those affected by Hurricane Charley, Hurricane Frances, Hurricane Ivan and/or Hurricane Jeanne. Please visit our web site at www.creditguard.org or call 1-800-867-0406 for a free consultation with a certified credit counselor.

* Curry, Pat. No credit? New credit scores target 'underserved' consumers. August 2004. Retrieved from http://www.bankrate.com/brm/news/credit-scoring/20040803a1.asp?prodtype=mtg

** Fair Isaac & Company Home Page – Solutions. Retrieved on October 05, 2004 from http://www.fairisaac.com/fairisaac/solutions/FICO+Expansion+Score/Expansion+Score+Overview

*** Peterson, Samantha. Credit scores for overlooked borrowers. August 2004. Retrieved from http://www.payrentbuildcredit.com/main/about/in-20040820.asp

**** Weston, Liz. Now bounced checks can trash your credit. Retrieved on October 05, 2004 from http://moneycentral.msn.com/content/Banking/Yourcreditrating/P86174.asp