Long answer: It just might save you hundreds of dollars next year.
UltraFICO isn’t a superhero in the Marvel Universe, but it might as well be. Superheroes save the world, but UltraFICO will save you money.
Over the weekend, reports trickled out that a new kind of credit score is coming in 2019. It’s called the UltraFICO Score, and it will change the way your interest rates are calculated on everything from your credit card to your mortgage.
In a nutshell, the new score won’t just judge you on how much you borrow and how quickly you pay it back. Starting next year, it’ll also consider how you manage the money in your bank — your checking, saving, and even money-market accounts, if you have them.
The Journal exclaims, “It is among the biggest shifts for credit reporting and the FICO scoring system.” Let’s break that down…
CPA Howard Dvorkin: Typically, credit in the past the person has been judged on their ability to pay and their history to pay timely. Now this product tells you something else. It tells you can this person actually pay me back if I lend them money, and frankly that’s beyond imagination for any credit guy in this country or world, frankly. Remember this product they don’t have freewheeling access to the consumers’ bank accounts. The consumer has to be part of the process by giving them their password – their bank passwords and login information – or else that creditor cannot gain access to the consumers’ bank accounts.
Personal finance columnist Jessica Patel: See that’s and interesting insight as well. When you’re being looked at for a potential loan or something like that, you don’t usually think about “Oh yeah, here’s my bank account information.” So, if you don’t provide that do you think it would preclude the lender from loaning them the money if they don’t provide that and do you think it’s more of an option or do you think it’s a necessity to be approved?
CPA Howard Dvorkin: I think it’ll become a necessity for approval. I mean it’ll be give me your Social Security number, give me your bank information. What I believe is the future is a capacity score where can this person handle any more debt and still maintain the credit history they had prior?
Personal finance columnist Jessica Patel: Actually, that’s a really good point and I think it’s going to open it up for millennials who haven’t used a lot of credit in the past and are kind of averse to using credit. And so now that there’s Venmo and there is PayPal and all of these new ways and they don’t use it and usually stick to cash and their debit card. So, I think this will make it easier for them to garner credit as well.
CPA Howard Dvorkin: It’s funny you say cash. I didn’t know people were still using cash. But certainly, this product that’s issued by FICO or Risk Insight certainly make sense and it is the future.
Personal finance columnist Jessica Patel: One of the potential downsides to this is those people who have great credit for years and like, owned credit cards for years but maybe they have some credit card debt, they pay out but they don’t always pay on time and maybe they’re a little over extended but they still have great credit, I would wonder about the implications for those people, whether the bank would then relook at their FICO score and be like “you know what, we’re going to raise your interest rate now, because we see that you can’t pay.” You know, because it’s never the opposite way like, “we see you can’t pay and we’re going to lower your interest rates.”
CPA Howard Dvorkin: Well that’s a very good point you’re making, I mean it’s going to give banks an excuse to charge more, because of the “risk profile,” which is unfair. The other problem is the same people may not have access to credit cards like most of us.
Personal finance columnist Jessica Patel: In terms of the FICO score it can help the lender see where their money is going. So, if you’re overextending yourself on your mortgage, maybe we shouldn’t extend you on your car payment for $700 a month. Maybe you should buy something that’s a little bit less. Then I think it will guide people in terms of budgeting, too, it could help. But again, it could also hurt. It really depends, as you said, it’s in the beginning stages of it and it’s just going to grow just like the regular FICO score does. And it’ll be interesting to see which lenders adopt it, because a lot of lenders are still using really outdated FICO scores.
CPA Howard Dvorkin: Well remember the Vantage score is also still out there. The FICO score has been you know the predominate player in scoring models. But the credit bureaus got tired of being taken advantage of from a pricing standpoint, so they built their own model. And that is an interesting play, so we’ll see a lot of advancements going on in this world and hopefully the consumer will benefit. But what I like about this, frankly, if the person is struggling there are a lot of people that go and even though they are struggling they’ll take on more credit that they can’t afford, and they know they can’t afford it. Maybe this will solve a few tears along the way.
Personal finance columnist Jessica Patel: Yeah exactly it will be good.
UltraFICO: “An appeal of sorts”
For years, Debt.com readers have told me horror stories about suffering a financial crisis —a divorce, illness, accident, or natural disaster — and then watching their previously awesome credit score plummet. There was nothing they could do about it.
UltraFICO will help. The Journal says UltraFICO “will function as an appeal of sorts.” If you apply for credit and your lender sees your “traditional” FICO score is weak, there’s now an option to strengthen it enough to get that loan.
Namely, that lender will be able to consider your “banking activity.” If you have even a few hundred dollars in your accounts, and you haven’t bounced checks or gone under the minimum balances, that will count in your favor.
It might not sound like much, but as anyone who’s applied for a mortgage or an auto loan knows, every little bit helps. When you talk about big-ticket items, a few points can be the difference of hundreds of dollars over the life of the loan.
Both sides want this
Skeptical Debt.com readers might be asking themselves, “What’s the catch here? Why would FICO want to help me have a better score?” If you’ve ever struggled to beef up your score, you probably feel like the business world is trying to keep you down. That’s not true.
Lenders want to lend you money. It’s how they make money. They follow rules just like everyone else, however. Those rules give them a good idea if you’ll pay back the money they’re lending you. If FICO — the gold standard in credit scores — says it’s crunched the numbers and figured out a credible way to expand the reliable customer base for lenders, that’s good for everyone.
Not all lenders are going to view the same scoring models. To know how your credit score will be judged, check out how do you know which credit score your lenders will use?
Neither side is seeing the downside
Of course, in the world of credit and debt, no good deed goes unpunished. While we’re still in the initial new cycle for UltraFICO, expect some skeptical analysis within the next few days. I’ll start.
Anytime you make it easier for Americans to borrow, you make it easier for them to default. As we’ve reported before for MSN, Americans owe a record-setting and eye-popping amount of debt: $13.2 trillion. That’s enough to buy every adult in the country a 2018 Mercedes Benz E-Class.
If we don’t pay that back, the housing bubble will look like a soap bubble.
Then there’s something I call “credit score shell-shock.” Credit scores have been changing a lot lately. As Debt.com reported, just this year has seen changes in the consideration of medical collections and tax liens. In 2014, we reported how renting was now being factored into FICO scores.
So if I had to sum up my own feelings on this huge development, it would come down to two words: cautiously optimistic. This change will help more Americans get the credit they need, but if they don’t simultaneously learn more about their money, we’ll look back on $13.2 trillion in consumer debt as the good old days.
Here’s hope more Americans getting more credit means more of them want to master their money. I don’t care if they do that at sites like Debt.com, but I do care they do it somewhere. To learn more about how to improve your credit score, check out How to Get the Credit Score You’ve Always Wanted.
Published by Debt.com, LLC