November 4, 2015
The FICO credit score is one such score that has been used to determine how financially responsible and trustworthy a consumer is. The credit number has been utterly critical to the home rental and loan application processes, especially after the financial crisis. In case a consumer doesn’t have a sufficiently high credit score (FICO), landlords and banks will most likely reject them.
There are an estimated 53 million Americans without a credit score and many do not have a sufficient credit score to get a loan. Many of them are recent graduates, migrants and young adults who prefer to avoid using credit, and veterans who have been out of the country.
Multiple credit building companies have tried to build solutions that help consumers in improving their credit score, but in most cases we have seen that the FICO score is still considered. But things are changing rapidly which might result in threats to the FICO score.
- FinTech startups are giving credit cards based on account data instead
Float is an innovative, mobile-first financial technology provider aiming to upend the systemic issues modern consumers face with traditional banking like technology, access, and a lack of credit history. Float issues a digital credit card that works with any NFC-enabled device, can be used online, or instantly transferred to any VISA debit card. A user needs to link a bank account and within seconds, a personalized line of credit is created based on checking account data, instead of FICO. Such a solution from Float is going to eliminate the challenges of the FICO score.
- Development of an underwriting model that also considers your university, course of study, postgraduation employment and income
A recent survey has revealed that more than 30% of people under 30 do not have a credit card, but in order to have a credit score, you need to have some form of credit. Credit cards have played a crucial role in building or destroying credit score. The CARD Act of 2009 has limited the ability of credit card companies to market credit cards on college campuses. This has also reduced card issuance. College graduates who do not have a habit of using credit cards are showing less interest in credit cards.
SoFi: SoFi understood the problem very early. Instead of relying exclusively upon your FICO, SoFi started using an underwriting model that also considers your university, course of study, post-graduation employment and income.
- The new rules of Federal Housing Administration
Under a key policy change that took place in August, lenders nationwide have more freedom to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines. These borrowers might have below-par FICO scores. According to the new policy, lenders will be judged under a fairer metric.
- Monitoring cash Flows
New lenders have started looking at cash flow for giving loans.
Earnest: Getting a loan from Earnest does not require a FICO score. They look at your bank account and see how you manage your monthly cash flow. It might be possible that a user with a high FICO score can use credit to pay credit. So if a company looks at his/ her monthly cash flow, it would give the company a better view of his/her creditworthiness. Earnest clearly states that it will turn down an applicant with an 800 FICO score if they find that the person does not manage the cash flows properly.
- Increasing adoption of low-cost installment financing services
FinTech startups are building affordable and transparent alternatives to old-school credit cards.
Affirm: Affirm’s instalment payments product is hugely beneficial for people who are primarily using debit cards and have not developed FICO scores. The company also addresses the requirements of people with low credit scores and people whose credit score has been hit during the financial crisis. Users who want to use Affirm can sign up at the checkout by filling in information, including name, mobile number and date of birth. Affirm pays Web retailers in full when consumers check out, then lets the consumers pay the balance 60 or 90 days later. In most cases, the interest starts at 6%, while merchants pay a transaction fee of 2% to 3% of the sale amount. Multiple online retailers who have partnered with Affirm have also realized the benefits. They have witnessed a significant jump in average order value.
- Startups are looking at individuals’ moral and personal responsibility
If a person is paying their utility bills on time, it clearly shows how responsible the person is. These types of factors had not been considered by FICO. Today, startups are looking at multiple sources before deciding the creditworthiness of an individual. More than 400 companies are capturing some form of data that can be used by lenders in decision- making.
FICO has also realized that in next few years, it might face immense challenges from FinTech startups that are doing comprehensive analytics before deciding creditworthiness. FICO has started a test project to expand the data sources it uses to assess creditworthiness. The test extends beyond traditional measures, such as those focused on debts, payment history and income. FICO has also started looking at things like cellphone bills, cable TV bills, property records and other public sources of information. It seems that FICO has also realized that its model might face a serious challenge due to the FinTech boom.