When it comes to evaluating credit, there’s really only been one game in town for a while–the FICO score. Since the 80s, lenders have used your FICO score (or some variation of it) to determine your creditworthiness.
People with bad credit or with no credit at all had difficulty building their credit because it took time and (yes) credit to do this.
But soon there will be a new way of evaluating your creditworthiness. Fair Isaac Corporation has developed a methodology that can analyze your saving and spending patterns within your cash-based accounts (checking, savings, money markets, etc.) to determine how likely you are to repay your debts.
It’s called UltraFICO, and while we’re still learning much about this new process, we’ll share everything we know so far in this article. I’ll also share some ways you can start to think about money differently now to prepare, as well as how this shift may impact our more global economy.
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The UltraFICO score is a new mechanism for determining your creditworthiness. While the exact details of it are still coming out, we do know a few things. First, it focuses on different factors than the traditional FICO score does.
Where the original FICO score will look at things like your debt levels, length of credit history, credit mix, and several other factors, it seems UltraFICO will focus primarily on your cash behaviors. Meaning, how much you keep in your checking, savings, and money market accounts, and how you use this money. It’s a way for those who don’t have credit or those who are rebuilding their credit, to prove their creditworthiness.
According to the FICO website, UltraFICO will look at things that the traditional score won’t pick up on, including:
- Evidence of savings and keeping a healthy average balance
- Maintaining a bank account over time
- Avoiding having a negative balance, and
- Regularly paying bills and making other bank transactions
Also unlike the traditional FICO score, you have to opt-in to UltraFICO. Fair Isaac Corp. says that “you are empowered to enhance your score by leveraging checking and savings account data in the score you build,” and that “if you have a low score or no score at all, you have a chance to increase your score based on data you share.” The process is done by simply using an app to connect your cash accounts.
But don’t get too excited just yet, as UltraFICO will first launch as a pilot. Fair Isaac Corp states that UltraFICO “will initially be available through a small group of lenders as part of a limited pilot phase for consumers who cannot currently access credit or, in certain cases, could be eligible for better terms.”
Will it replace the current FICO score?
Probably not. The traditional FICO score isn’t something you “opt-in” to. The UltraFICO is really designed for people who are building credit.
If you think about it, the only real way to build credit now is to have credit–which seems completely backward. For someone with no credit, they’d have to apply for something like a secured credit card, use it, pay the bills on time, and over time build up their credit score.
With UltraFICO, they can do this through showing good financial behaviors in cash accounts. So no, I don’t think this will replace the current FICO score, but it will definitely be an additional data point for lenders, assuming you choose to opt-in.
What does this mean for you?
Initially, this doesn’t mean anything for you unless you choose to opt-in to UltraFICO. Assuming you do, though, you’ll want to pay attention to how you manage your cash accounts. The official press release on UltraFICO says that it “leverages account aggregation technology and distribution capability from Experian and Finicity to help consumers improve access to credit by tapping into consumer-contributed data, such as checking, savings and money market account data, that reflects responsible financial management activity.”
Finicity is a company that provides financial data to help people and companies make informed financial decisions, so by opting in they’ll be able to pull data on how you use your money. Why would you want to do this? To boost your credit score of course. FICO says that 70% of consumers “that show average savings of $400 without negative balances in past three months see an increase in their FICO® Score with the UltraFICO™ Score.”
So how does this impact the way you manage your money?
Well, for starters, you’ll need to be cognizant of how much is in your checking, savings, and money market accounts. If you don’t connect the account, Finicity can’t pull data about it, so it won’t be considered. That being said, I wouldn’t recommend connecting accounts with no money in them. You’ll also want to make sure you’re not overdrawing your accounts–as that’s a negative impact on your financial wellness.
How will you check your Ultra FICO score?
Right now, UltraFICO is in test mode. FICO says that the “initial pilot phase is designed for fine-tuning of the deployment of the score,” and that once they “complete the pilot phase, the UltraFICO™ Score will be more broadly available.”
Once that happens, the UltraFICO score will be open to about 15 million consumers. By the looks of the demo on their site, you’ll use a lightweight app to find and connect to your bank, select which accounts you want to be considered, confirm, and move on.
What does this mean for the economy?
The economic impacts are still unknown, but there are a few things that we could see happen because of this change:
- An increase to consumers’ average FICO scores. We just recently saw the average FICO score for consumers reach an all-time high, and I think this could drive that upward even further. With a new way of building and improving credit coming, it can begin to impact the entire credit picture of consumers.
- More people having access to credit. Currently, you need to have credit to build credit. With UltraFICO, ideally, you’d be able to build a credit file by just managing your cash accounts well. I don’t imagine you’d reach peak scores by doing this, but it will be enough to get many consumers who haven’t had credit before, access to things like credit cards and car loans.
- Increased consumer debt levels. With more people having access to credit, one can surmise that the average debt levels would increase. How this will impact the economy is unknown because it would depend on the levels of debt, the levels of default on that debt, and where the debt was located. For instance, if UltraFICO allowed people with no credit to build enough to get a mortgage loan, that would be risky since they’ve never shown they could manage credit before. My guess is that unsecured debt (i.e., credit card) will gradually increase which may have a slight impact on rates.
Pros and cons
A major change like this comes with both pros and cons. Here’s what we feel will be both positive and negative as a result of UltraFICO:
- People with no credit can build it in a new way
- Those rebuilding their credit will have another means to do so
- Consumers with excellent credit can strengthen their credit even more
- Encourages people to save more and spend consciously
- Will most likely improve credit scores across the board
- Will come with data mining – in order to evaluate your UltraFICO, your cash balances and spending patterns will be analyzed, which may be a privacy concern for some
- We don’t anticipate it will replace, or even build a full credit profile – it’ll be more for support of building one
- It may not be widely available for a while (projected summer 2019)
While there isn’t a ton of information out there about UltraFICO, we know it’ll be a game-changer in analyzing credit. Up to this point, you could only build credit by having credit, and recent law changes have made it more difficult to obtain credit early on (like the shift from needing to be 18 to needing to be 21 without a cosigner on credit cards).
Adding a new method for building credit will provide many people who are building or rebuilding their credit with access to things like credit cards and car loans. Yes, this may increase debt and default levels, but it may also have a positive impact on the economy by increasing spending and borrowing.
We should know more early next year, but until then, I would strongly encourage you to start building up a savings account and watch how you spend your money in your checking account.