If You're in These Groups, Your Credit Score Could Be About to Get Better

FICO (FICO 0.05%) is planning to roll out its UltraFICO credit scoring model, which takes bank account information into consideration, in addition to more traditional credit metrics.

In this Industry Focus: Financials clip, Matt Frankel, CFP, discusses what he learned about the new scoring model from the FICO team at this year's Money 20/20 conference in Las Vegas.

A full transcript follows the video.

This video was recorded on Oct. 29, 2018.

Jason Moser: Let's go ahead and kick it off with a story we talked about before, the UltraFICO rating. We know that FICO was looking to add this UltraFICO rating, which was going to take into consideration the way people manage their checking accounts and savings accounts, and incorporate that into their credit score. The first inclination for both of us was to look at this with a little bit of skepticism. Matt, you were able to speak with some folks out there at the Money20/20 show. Tell us a little bit more about this UltraFICO and what you learned.

Matt Frankel: I had a long conversation with the head of scores at FICO. They shed some light on some of this. This is designed to help two key groups. First is younger people or people who may not have much of an established credit history. For example, if you've never used a credit card, you've never gotten a mortgage, you might have either a terrible FICO score or no FICO score, depending on how little credit you've used. That's somewhat unfair to customers like that. Under traditional means, we have no way of assessing how well they handle their money. That's group one. Group two are people who are rebuilding their credit. It's not people with bad credit, but people who have had a couple of dings a few years ago, maybe, and now are just getting back on their feet and need an extra boost to show how they're behaving lately.

To be clear, one thing FICO shared with me is that the vast majority of this formula is still going to be the traditional FICO reporting metrics, such as your payment history, the amounts you owe on your accounts, the length of your credit history, and so on. For people with bad credit, this isn't going to make the difference between getting approved or not. If you have terrible credit, you're still going to have terrible credit under this UltraFICO score. It's meant to give a boost to people in those two groups who, for one reason or another, the regular FICO formulas may not reflect their real credit risk.

Moser: That's a good point there. I think about the common observation that when you're a student, maybe 18-20 years old, you probably haven't had a chance to develop any kind of a credit history because you haven't had the need to borrow for a car or a house, or perhaps respond to a credit card solicitation in the mail. If this is something that they can use to actually help establish someone I mean, that makes sense. If you're going through pretty reliable data there, the way someone might manage their checking account and/ or savings account, you do have to know how to balance those books to make sure you're not overdrafting the account. So that's actually a good thing.

One thing I also saw this morning, I noticed, is that Capital One Financial and Discover Financial Services both seem to be pulling back a little bit on credit offerings. Essentially, both companies noting that right now, it seems like everything is looking pretty darn good. Consumers are feeling confident, unemployment is low. This is a great, great time to be out there making some money and spending it. But they're thinking a little bit forward. Really, this is more from a risk perspective. They're trying to keep a lid on this thing getting out of control. Perhaps that UltraFICO can help out, as well.

Frankel: Yeah, definitely. And it's not just overdraft history. They told me there's actually a lot of banking information considered in this. Savings behavior is one thing, whether consumers have had a steadily growing average balance for the past few years, things like that. They say that the data really backs this up, that these behaviors that they're going to be looking at really do predict financial performance. They also said that they have a ton of financial institutions, both big and small, that are very interested in this to expand their prime lending base.

While I'm still approaching this with a healthy level of skepticism, in terms of, will it increase default risk, it definitely serves a purpose, I could say after talking to them.

Moser: That's good. It's nice to see both sides of it.