You pay your rent on time every month, keep your savings account padded with at least a few hundred bucks, and don't overdraw your checking account. While these are all responsible money management habits, they haven't actually been helping you build your credit–but that could change soon.
FICO, which is the most widely used credit score, announced that beginning in 2019, it will test a new model that takes consumer's money management skills into consideration alongside credit responsibility.
Consumers can opt to allow the UltraFICO system to generate their new scores based on data from their bank accounts. You will have a say over which accounts can be accessed, which could include your checking, savings, and money market accounts.
If you've been unable to get a conventional mortgage due to so-so credit but have been a diligent saver, this announcement may perk up your ears. Unfortunately, it remains to be seen, though, as to whether the UltraFICO model could help you qualify for a mortgage.
Though the new score is expected to give consumers more control over their credit scores by allowing them to contribute data from their bank accounts, the mortgage industry at large will need to accept this report, says Peter Grabel, managing director of Luxury Mortgage Corp. Until that happens, it's unlikely to impact a home buyer's ability to obtain financing, he says.
"There are many credit scoring models sold by the credit bureaus and consumers cannot select which one is used," Grabel says.
According to FICO, the use of UltraFICO could boost the scores of those who fall in gray areas with scores in the upper 500s to lower 600s or others who are just below a lender's score cut-off. It could also give a lift to those with limited credit history or those who experienced some financial distress and are now working to re-establish their credit.
With the new system, Experian–one of three main credit bureaus–will gather your bank account data using Finicity, a financial technology firm.
Here's a few factors from your bank account that could help boost your score:
- Keeping an average of at least $400 in savings
- Not having any negative balances in the last three months
- Regularly using your accounts to pay bills, such as rent and utilities
- Establishing account history by keeping your bank accounts open and active
This new system, if adopted, could help more consumers become homeowners, explains Robert E. Tait, a senior loan officer with Allied Mortgage Group. If a borrower's FICO score doesn't fall within the lender's underwriting guidelines, the lender could offer to have the FICO score re-calculated using the borrower's banking activity.
"The important question that needs to be asked is 'Why the change?' The why, I suspect is because lenders are looking for more qualified borrowers and they need help getting them," Tait says. (An August 2018 study might validate his line of thinking, finding that 20 percent of all conventional conforming mortgage loans are now going towards traditionally 'risky' borrowers since there aren't as many low-risk applicants available as banks would like.)
The way Tait sees it, though, the UltraFICO could potentially allow more borrowers to borrow money less expensively, which is a win for consumers.
A potential concern that Tait points out, though, is the security of system–especially on the heels of the 2017 Equifax breach that compromised the personal information of 143 million consumers.
The next step for FICO: Figuring out if people will actually be willing to share their banking information for a potentially higher score (and if lenders and banks outside the launch partners will accept this score). That's part of the reason the UltraFICO score is launching in early 2019 on a pilot basis.