The Fair Isaac Corporation’s FICO scores are the output of a broad range of data inputs, tied to payment history and debt loads carried by applicants, and how long they’ve built a credit file. The FICO score range is between 300 and 850 — and for those that fall below the 670 level, generally speaking, it’s more difficult to get credit on good terms or get credit at all.
Credit Access Gaps
The PYMNTS Intelligence report “How Credit Insecurity Is Changing US Consumers’ Borrowing Habits” found that 69% of consumers were “credit secure,” extrapolating from a population of more than 2,670 individuals surveyed. An estimated 63.5 million are credit marginalized, and nearly 17 million are credit avoidant and have entirely given up on credit, as the traditional scoring models have in effect left 80 million consumers without steady access to credit.
In recent weeks, common shares of the credit model firms have been volatile. FICO, which is a huge player in mortgage credit scoring, has been criticized by Bill Pulte, director of the Federal Housing Finance Agency, for boosting prices charged for access to FICO scores. The read-across is that government-backed mortgage entities Fannie Mae and Freddie Mac (which are in turn regulated by the agency) may mull using other credit reporting beyond FICO in a market where most mortgage applications have relied on FICO scoring.
The FICO score has been around since the late 1950s, and there are no indications that the traditional model will be falling wholly by the wayside. But there are signs that the credit arena is roomy enough and allowing new entrants to take their place as competitors, and even collaborators, with the giants of the field. Plaid, in one example, launched its own solution, through a consumer reporting agency, to enable (consumer-permissioned) access to individual-level cash flow reporting to lenders during their underwriting process.
The Lures of Alternative Data
FICO scores look toward a history of debt management — the loans taken out and the paydowns of those loans — to calculate those three-digit numbers. Thin-file individuals, who lack credit history, can be caught up in a vicious cycle where to get credit, they had to have had credit. And to have had credit to build a credit history, access has been and always will be key.
Alternative data casts a net that broadens the inputs of credit scoring models, including income, rental payments and bank-account level data that gives insight into cash flow and ability to repay. Open banking allows consumer-permissioned data to be made available to lenders that can help tailor loans to the individuals’ situation and improve underwriting.
The Credit Access and Inclusion Act would allow landlords, utility providers and telecom companies to report on-time payments to be used in credit scoring, including by the agencies themselves. TransUnion said in 2021 that adding rent payment tradelines in credit scoring means that approximately 9% of credit invisible consumers went from unscorable to scorable, with an average credit score of 631, placing them in the near-prime score band.
