2019 will bring big changes, more control to first-time borrowers
Experian, FICO offer new ways to influence your own creditworthiness
As a growing number of lenders embrace alternative data to evaluate applicants, it’s getting easier for new borrowers to get approved for their first loans.
All consumers have to do is to share a little more information about themselves than they’re used to providing credit companies. In exchange, they could be granted a cheaper, more appealing loan than they would have otherwise been able to get.
Already, a raft of alternative lenders have popped up in recent years, offering lower rate loans and competitive credit cards to thin-credit borrowers who share information about what’s in their bank accounts, where they went to school, how much they’ve invested and other alternative data points.
The year-old Petal card, for example, offers a variable rate of 15.24 percent to 26.24 percent – similar to what’s offered by most general market credit cards. Meanwhile, the Deserve Edu Mastercard charges a single rate of 20.74 percent.
But as 2019 begins, young borrowers with thin or nonexistent credit histories will soon have something else to look forward to: the ability to proactively influence their FICO scores – and potentially increase their scores by several points – simply by granting traditional credit agencies access to their savings and checking account information, utility payments and more. As a result, consumers with thin or spotty histories may have an easier time qualifying for loans from more traditional lenders.
Experian lets borrowers share more information about themselves
On Dec. 18, the credit bureau Experian announced it would soon allow borrowers to incorporate nontraditional information into their FICO scores. That way, they’d get credit for paying everyday bills that don’t usually get counted.
Beginning in 2019, borrowers who grant Experian access to their bank accounts will be given an updated FICO score that takes into account unconventional data, such as utility and cable payments. So if you regularly pay your everyday bills, you may see your FICO score go up.
The extra data may even help you “boost” your score just enough to get a better credit offer. According to Experian, 75 percent of consumers with credit scores under 650 saw a positive uptick in their scores when they linked their bank accounts. Meanwhile, 14 percent with credit scores under 579 saw their scores move up a notch to 620 or above – which counts as near prime.
It’s not clear how widely used the new service, dubbed Experian Boost, will be. But if it takes off, it could prove to be a big deal for first-time borrowers – many of whom struggle to convince lenders that they’re trustworthy.
Times they are a-changin’
Until recently, young borrowers often had a hard time accessing affordable credit due to a notorious catch-22 that ensnared just about every new borrower without a reliable co-signer: Because they had never taken out a loan before, much less owned a credit card, they didn’t have a credit score. As a result, many lenders would simply refuse their applications – or offer sharply higher rates.
Some consumer advocates and industry insiders responded to the problem by pushing for more expansive credit reporting so that people without a traditional credit score could get a second chance. They argued that including nontraditional information – such as utility or rental payments – in people’s credit files would give first-time or occasional borrowers a chance to demonstrate to lenders that they are responsible.
It would also help lessen the incentive to take out a loan or a credit card just for the sake of building a credit history. Many credit-skeptics who are more comfortable using debit for everyday purchases have been penalized for their choices and have had a harder time qualifying for new loans.
Lenders give thumbs up
So far, lenders have mostly warmed to the idea of using nontraditional data. According to a May 2018 report by Experian, 80 percent of lenders look at information beyond what’s in a traditional credit report when assessing potential borrowers.
Seventeen percent plan to eventually incorporate data points, such as utility or rental payments, into their credit decisions. Meanwhile, 78 percent of lenders think they’d have an easier time identifying creditworthy borrowers if they could consider additional data.
However, many lenders have been held back by the fact that it’s so rare for nontraditional data to be reported to traditional credit bureaus. Landlords and many utility companies, for example, have the ability to report positive payment information so that it’s included in people’s credit files. But very few actually do so.
Enter Experian Boost. By linking their accounts to it, consumers can effectively report that information themselves and ensure it will be counted.
FICO is also giving consumers more power
FICO is taking a similar approach. Earlier this year, it announced that it would debut a brand-new score in 2019 that also incorporates nontraditional data supplied directly by borrowers. FICO has previously released other scores that incorporate nontraditional information (such as FICO XD 2), but those scores rely on information pulled from data brokers like LexisNexis and other sources.
The new UltraFICO score will judge consumers’ creditworthiness by evaluating their checking, savings and money market accounts. If you allow FICO access to your accounts, it will look at whether you save more than you spend and maintain a “healthy average balance.” It will also look at how long you’ve owned a bank account and whether you’re regularly paying your other, non-credit bills on time.
It’s similar to what many nontraditional lenders have been doing for years. For example, alternative lenders such as Earnest and SoFi were among the first lenders to start looking at people’s bank accounts before approving a new loan.
Be careful about what you share – and whether it will help you
Both Experian Boost and UltraFICO rely on consumer (and lender) opt-ins, and so their success will largely depend on how open consumers are to sharing their personal information – and how eager lenders are to use it.
Linking accounts (rather than having a bank share it) gives consumers more control over what a credit bureau and lender can see. But it still requires a substantial amount of trust – particularly since so many intimate details can be gleaned from your transactions. According to Experian, 70 percent of consumers would consider sharing their personal information if it helped them get a loan.
However, not all consumers will benefit from the extra information. For example, if a lender or credit scoring company detects that you spend more than you make or have an erratic income, you could have a much harder time getting approved. You may also balk at just how much information you share when you give away your bank details. In addition, some consumers may worry about the security of their data.
Before you share your personal information, think carefully about what you want to share and whether it will really help you. Granting access to your personal information could help you get a much better deal. But it also comes at a cost: By sharing your accounts, you will be giving creditors – and anyone else who gains access to the data – a much bigger window into who you are and how you live.
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