The way consumers are evaluated is changing. The FICO score has been the main factor in determining an individual's creditworthiness for decades, but it is becoming less important. Now, banks and other financial lenders are relying on different data points to evaluate a person's creditworthiness. This change may make it easier to apply for financial assistance.
Why Are Banks Slowly Moving Away From The FICO Score?
Major financial institutions such as Synchrony Financial, JP Morgan Chase, and Capital One, are placing less importance on FICO scores. Fannie Mae and Freddie Mac may also allow lenders to evaluate mortgage applicants based on other factors. The concern that FICO is ostracizing many Americans from accessing affordable credit, is driving this change.
Banks are now developing their own system of evaluating credit applicants based on numerous different factors. Banks are considering deposit balances, the item being purchased (for by-now-pay-later loans), the number of overdrafts, and any previous lending history when making their determination. In the future, banks may also consider utility, cable, and cellphone payment histories.
Some banks, such as JP Morgan, rely on FICO scores for mortgages and auto loans, but not as much for credit card applications. The reliance on FICO scores for mortgages may change as well, as Fannie Mae and Freddie Mac contemplate allowing lenders to use other measurements, like VantageScore.
Why Is FICO An Issue?
Nearly 53 million Americans have little or no borrowing history, restricting their access to affordable credit. Having a positive borrowing history produces a good FICO score, but millions use debit cards or cash for their transactions. This results in a thin or non-existent credit history, leaving them at the mercy of pay-day loans or other less-than-ideal options. That appears to be changing.
Others point to the racial discrepancy as a reason to scrap, or lesson, FICO's influence on credit approvals. Last year, the Office of the Comptroller of the Currency (OCC) determined that their regulations, meant to protect banks from losses, were inhibiting Hispanic and Black Americans from obtaining affordable credit.
The OCC organized the Roundtable for Economic Access and Change, or Project REACh, to discuss this issue. They concluded that banks ought to share account information with one another so lenders can see the whole financial picture of credit applicants.
How Does These Changes Benefit People and Businesses?
This is good news for millions of Americans. For those who are responsible with their money but don't have a comprehensive credit history, these changes may open more lending opportunities.
This is also good news for businesses. While businesses are separate entities from their owners (in many cases), lenders often factor in the business owner's personal credit score when evaluating the creditworthiness of the business. Many loans require a personal guarantee by the business owner.
If you own a business but have little or no personal credit history, this can hinder your business's access to capital. If these changes expand your personal access to credit, utilizing it wisely may also expand your business' access to credit.
Conclusion
The reliance on FICO is starting to wane. FICO can prevent responsible borrowers who don't have a lengthy credit history from accessing affordable credit. As banks rely on their own measurements of creditworthiness, more people may have access to financial assistance. This also means some businesses may have increased access to capital as well.
