FICO Expansion Scores
Here is good news for those of you that have not established a "traditional" credit history. And, it is also good new to us Realtors ® as well as homebuilders, and mortgage lenders. What is meant by traditional credit history is the use of credit over a period of years. People that have made car payments, mortgage payments, personal loan payments, and credit card payments over several years have established a "traditional" credit history. The three national credit bureaus, Equifax, Experian, and Trans Union collect these types of credit histories and report them when they receive an inquiry. Use of these same traditional sources of credit along with other information is used to establish a FICO or Fair Isaac Corporation score. See Credit Scores.
Unfortunately, in the past, it was sometimes better to be a debtor than a non-debtor. For example, if an individual had debts they established a credit history and a FICO score. If they handled credit well they got a high credit score and if they handled it poorly they got a low score (from 300 to 850 the higher the better). Whereas, those that rented an apartment or rented-to-own a house; paid cash for their car; that purchased the things that they need, such as utilities or cable, with cash, money orders or checks; and did not run up debts found them selves without a credit history. And because of not having a credit history, they ended up either with a low FICO score or none at all. The three national credit bureaus did not collect and report this non-traditional type of credit information.
A credit risk score attempts to predict the likely hood that a consumer will become seriously delinquent (seriously delinquent is defined as 90 days or more past due) in the 24 months following scoring. The result of a low credit risk score can be disapproval for some types of loans or paying higher interest rates. It is ironic, that someone with debt could actually get credit easier and cheaper than an individual without any debt.
Fair Isaac, the originator of the FICO score, is trying to remedy this situation. By establishing a new bureau, Fair Isaac Credit Services, Inc. a subsidiary of Fair Isaac Corporation, which will collect data on renters and rent-to-own purchasers, cable and utility payments, pay day loans and other forms of non-traditional credit. And, Fair Isaac will utilize this information to create a new alternative credit score (ranging from 150 to 950 - again higher numbers are better) called FICO Expansion Score. Included with the score is up to five statements of why the individual failed to score higher. This new score is currently available to mortgage lenders via the web directly from Fair Isaac and in the future through the three national credit bureaus. See fairisaac.com or MyFICO.com.
This new credit risk scoring should assist many to more easily obtain access to credit and qualify for mortgages. It is felt that this new scoring will be particularly a boon to minorities, young adults, recently divorced or widowed, and immigrants who tend to be under represented in the credit markets - "credit-underserved." Fair Isaac research estimates that one-fourth of the adult US consumers lack reports or have too little information on which to base a report. If this is right, that is over 50 million people. But one must understand that even under the new scoring, it is still necessary to meet one's obligations in a timely manner and not become over extended in order to get a better rating.