I run a lot of credit checks and I recently have noticed much higher scores for 20 somethings with just a single credit card. It has perplexed me, because I am now seeing 750+ scores where (before) a 6 month old card with a $300 limit would generate a 680 or so. Just ran across this article at BankRate which explains it: No credit? New credit scores target 'underserved' consumers By Pat Curry â?¢ Bankrate.com Consumers who have been turned down for credit or who've paid a higher interest rate because a scant credit history gave them a low credit score have another shot now at more favorable terms. Fair Isaac Co., creator and owner of the FICO score that is widely used in the mortgage, auto loan and credit card industry, has created a new score designed to predict credit risk for individuals with little or no credit history. The new FICO expansion score draws on information in an array of small credit reporting agencies outside the realm of the three major credit bureaus, says Craig Dillon, vice president of scoring solutions at Fair Isaac. The new score draws on data from industries such as pay day loan companies, rent-to-own stores and banking organizations that share information about people who abuse overdraft protection on checking accounts. The company's market research, which is confirmed by others in the credit industry, indicates that while about 160 million consumers have enough information on file to generate a valid FICO score, as many as another 50 million do not. The consumers who might get a break with the new score include recent immigrants to the United States (whose good payment histories from their home countries don't transfer to the U.S. credit reporting system), college students, new divorcees and widows, those with low incomes, and people whose cultures don't trust financial institutions or large national organizations, Dillon says. A FICO score is a three-digit number used to predict how risky it is to extend credit to an individual. A statistical algorithm that compares a person's credit history to those of millions of other consumers, it uses a scale from 300 to 850. Most people will have scores between 600 and 800 -- if there's enough information in the credit bureau records to generate a score. That information comes from such places as mortgage companies, credit card issuers and auto financing companies. Without sufficient information at a credit bureau to generate a FICO score, or so little information that it produces a very low score, many consumers either are turned down for credit or pay more for it. They might have never paid their rent or their utilities late, but those companies generally don't report payment data to the credit bureaus. Many times, the need to gather a year's worth of rent receipts or utility payments discourages borrowers from even trying to get a mortgage, says Randall Johnson, CEO of Florida-based Market Street Mortgage Corp. "To have (Fair Isaac) convert that information to a credit score is a real help to the industry. If it operates the way it should, it should be a real win-win." The new score won't help individuals who have a low FICO score because they've messed up their credit by paying their bills late or walking away from them. "This isn't the great fix for those who have charge-offs or a poor payment history," says Cate Williams, vice president for education for Money Management International, a Texas-based credit counseling agency. "It rewards people who weren't in the credit market, or preferred not to be in the credit market. Believe it or not, some people don't like credit." Mortgage lenders say the prospect of having another tool available to simplify the underwriting process would be a welcome change to the current process of collecting data by hand. It's time consuming, labor intensive and subject to fraud, says David Motley, executive vice president production manager of Fort Worth-based Colonial National Mortgage. "I'd love to see it work," Motley says. "If this is effective and performs as well as the regular FICO, it will lower the cost of credit and put more people in houses ... This will make this type of loan more fundable and improve the pricing." The score is available both to lenders and direct to consumers at www.myfico.com. The cost for consumers to get their score is $12.95, says Fair Isaac spokesman Craig Watts. Will the 'good news' make it into the report? Brad Scriber, lead researcher on a credit scoring accuracy study for the Consumer Federation of America, says that while it's encouraging to see an opportunity for millions of consumers to get greater access to credit, many of the industries from which the data is being collected have a history of only tracking customers who don't pay on time. "One of the great strengths of mainstream credit industry in this country is if you do things right, you get rewarded," Scriber says. "If it's relying solely on negative data, it could hurt consumers doubly." It is difficult to get positive information because it takes more energy to collect, file and report, Watts says. Plus, competitors don't want to give away information on their good customers. But Fair Isaac's data sources do provide both positive and negative credit information, and they have confidence that the data is strong enough to provide a valid score. Others aren't so sure. "I'm not confident that the sources of the underlying information are accurate," says Howard Dvorkin, CEO of Consolidated Credit Counseling, a national nonprofit debt management group. "These are the people most desperate to get credit and most vulnerable to life situations that could affect their ability to pay, which can't be quantified." That's a stereotype about the underserved credit market that needs to be erased, Watts says. Fair Isaac's research has shown that the consumers who lack credit information come from diverse income levels and educational backgrounds. "It concerns me that people think that the only people this applies to are subprime (people with bad credit histories) and the very poor," he says. "They haven't engaged in a formal relationship with a bank. That's the only thing they all have in common." -- Posted: Aug. 3, 2004
