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The Fair Isaac Corp. (FICO) and data firm, CoreLogic, plan to release a new credit score that would change what affects credit score rankings for consumers by accounting for new information.The companies evaluated the current factors of the FICO score, and decided that including short-term loans and rental information into the FICO score calculation will likely help borrowers appear less risky to lenders.
New Credit Score Factors
In the standard FICO score system, specific data about consumers is calculated to determine their credit scores, including credit card history, traditional mortgage and auto loans, credit defaults and collection accounts.
However, many have argued for years that this FICO score calculation method doesn’t account for individuals who are underbanked, or don’t have access to banks in their areas and therefore aren’t taking out loans. Also, the existing factors of what affects credit score outcomes does not consider people who rent their homes, sidestep mortgage loans to buy homes in cash and don’t want credit cards.
Together, FICO and CoreLogic have worked together to pull consumer data, including property records and liens, short-term instalment loans for used cars and rental information, to develop a new credit score.
CoreLogic said that the new system offers a more accurate depiction of borrowers with a more precise score.
70 per cent of Scores Improve with New FICO Score Calculation
Vice President of CoreLogic, Tim Grace, estimated that 70 per cent of people will end up with better credit scores due to the updated FICO score calculation.
Even more astounding is that about 44 per cent of the U.S. landed into the 800 to 850 FICO score range — the highest possible bracket — under the new score, as opposed to about 18 per cent under the current system. The number of people in the 700 to 799 bracket dropped some, but this was due to the rapid increase in Americans with even better credit under the new method.
The benefit of the new score is that more borrowers could qualify for various types of loans and credit cards as well as lower interest rates. Unfortunately, the new FICO score will not replace the traditional score anytime soon, since many lenders require the use of FICO scores.
CoreLogic predicts, however, that some banks may begin utilising the new score as a supplement to the regular score. Currently, 25 lenders are already testing the product.
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