FICO Scores Are Losing Influence As Banks Begin Using Their Own Metrics

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Long the gold standard for most lenders to determine credit worthiness, the FICO score’s influence is slowly fading and major lenders are instead looking to in-house and alternative evaluations.

Learn: Why Having a Perfect Credit Score Is Overrated
Read: What Is a Good Credit Score?

Dating back to 2012, a Consumer Financial Protection Bureau report stated that “when a consumer purchases a score from a nationwide consumer reporting agency, it is likely that the credit score will not be the same as the score used by a particular lender or other commercial credit report user in making a lending to other score-based decision with respect to that consumer.” They added that the difference in scores reflects not only differences between scores sold to consumers and scores sold to creditors, but also differences among scores sold to creditors.

This means that when you log onto a site like a freecreditreport.com or other similar credit reporting site, the score they are selling you, and your score that they are selling to your bank, could be entirely different. This can also mean that for the same one consumer, the same credit reporting agency could likely be selling different scores to different banks, even though the credit file is the same.

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During the pandemic, banks drastically halted lending to U.S. consumers, the WSJ reported, because they could not tell who was creditworthy anymore and who wasn’t.

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A provision included in the coronavirus stimulus relief bill created a sort of blind credit spot for lenders. The new law stated that lenders that allow borrowers to defer their debt payments cannot report them as a “late payment” to credit-reporting agencies. From March 1, 2020 through the end of May 2020, Americans deferred debt payments on more than 100 million accounts, according to TransUnion. The unique situation left many credit reporting agencies and lenders looking for alternative methods to deem a borrower’s risk and creditworthiness.

Bank credit executives say their own internal data and proprietary scoring methods are more reliable, the WSJ reports. They factor in information from credit reports, but also deposit balances and overdrafts to determine an overall picture of a borrower’s responsibility. They also have the advantage of a prior lending relationship with applicants, be it through other personal loans, credit cards or mortgage pre-approvals and lines of credit.

They added that JP Morgan, for example, still uses FICO scores for mortgages and auto loans, but relies on FICO scores much less for many credit card originations, especially when the applicant has a pre-existing relationship with the bank.

One interesting way consumers have been boosting their credit scores — subscriptions.

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Los Angeles-based startup Grow Credit is one of many new companies that attempt to help build up credit scores for people who cannot or do not want a credit card.

The company uses a virtual Mastercard that allows for consumers to pay for their online subscriptions only, meaning Netflix, Amazon, etc. The idea is that since consumers are paying for this anyway, they should set up a specific card that limits spending specific to subscriptions in order to help build credit. The monthly transaction limit is $17, with 0% APR and no fees. The free plan also gives you a free FICO score and a 12-month duration with free renewable option. Other paid options allow you to add premium subscriptions and even cell phone bills.

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The growth of these kinds of companies can help the 26 million “credit invisible” Americans level the lending playing field. According to Forbes, credit scores have gotten attention over the past few years from critics who claim that FICO scores and their use of data is reflective of historical bias while omitting data like rental and cell phone payments that may include a broader population of people, including Black and Hispanic consumers.

The rise of startups circumventing these problems and banks using their own proprietary reporting methods could mean that FICO will either have to broaden its own reporting mechanisms, or permanently lose the market dominance it’s enjoyed for decades.

See: 30 Things You Need to Know to Build Credit
Discover: A Look at the History and Future of the Credit Score

What This Means For You

The good news is, the requirements for credit scores and reporting are likely not going to be as stringent as they were before. If the trend continues, this means that all of a consumer’s bills, balances and payments will count towards a lending decision. This could eventually bridge the lending gap and offer lines of credit to more varied types of borrowers. Taking advantage of alternative credit-building mechanisms like Grow Credit and speaking with your bank about their own decision methods are a good idea to start building your own credit.

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Last updated: July 26, 2021

About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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