Your credit score could be going way up soon thanks to a new scoring model that’s being introduced early next year by Fair Isaac Corp — the originator of the popular FICO score.
33 million may get a higher credit score thanks to UltraFICO
For years, you’ve heard it as an article of faith: Paying your bills on time each and every month is the single most important thing you can do help your credit score.
But now, a new innovation in credit scoring promises to shake up that conventional wisdom.
Beginning in early 2019, Fair Isaac Corp plans to roll out something called the UltraFICO Score, according to a report in The Wall Street Journal. This new scoring model would take into account how much money you have in the bank and how well you manage it.
The Journal reports that Fair Isaac doesn’t envision UltraFICO as a red light to stop borrowers from getting credit. In fact, it’s the other way around; they hope UltraFICO will be used by lenders as a green light to increase the number of people with approved credit applications.
“If an applicant’s traditional FICO score falls short, a lender can offer to have the score recalculated to reflect banking activity,” the newspaper writes.
If that’s the case, you will then have the opportunity to choose which accounts you want factored in for the recalculation. Of course, it is possible for your score to go down on recalculation, not up.
FICO says if you meet the following criteria, you would most likely benefit from the new scoring model:
- Have at least $400 on deposit in a checking, savings or money market account
- No overdrafts within the last three months
- Show a lengthy history of having an account open
- Demonstrate frequent transaction history
Some seven million applicants with very little established borrowing history — and a low credit score to show for it — are expected to see a boost in score when UltraFICO is rolled out next year.
Meanwhile, FICO forecasts that another some 26 million subprime borrowers will also see higher credit scores. About 6.5% of them, or four million subprime borrowers, could see an 20-point minimum increase in credit score.
Pentagon Federal Credit Union, the nation’s third-largest credit union by assets, will reportedly be among the first institutions to do a trial run with the UltraFICO score.
Bigger picture: Is this a good development or a bad one?
Clearly, millions may benefit with new and expanded access to credit as a result of this big change to the scoring model. Of course, we should note that getting credit is a double-edged sword.
On the one hand, having great credit will unlock a world for you where you get lower rates on insurance premiums, enjoy more favorable interests rates on mortgage and auto loans and more.
On the other hand, it’s easy to burn yourself financially by paying interest if you can’t pay your credit card bill in full each and every month.
That’s why money expert Clark Howard has always stressed both the opportunity and the hazard inherent in obtaining credit.
“It’s important to remember that getting credit requires you think through how you’re going to use it,” he says.
“If you know that you’re the type of person who is going to use any credit you may get and not be able to pay back your debts, forget everything I’ve said about why you need to have credit. For you, having credit is simply too dangerous and you should live on a cash basis.”
Read Clark’s full philosophy on credit cards here.