FICO is testing a new scoring formula that will consider monthly bills like utilities, cable bills and wireless plans when determining creditworthiness. For the nearly 15 million of 53 million Americans who currently do not have a FICO score this could be good news. But for others it could spell disaster.
According to the Wall Street Journal (WSJ) the score will also factor in how often a consumer changes addresses. Frequent address changes suggest instability, according to the WSJ article.
Utility, cable or cell phone payments are not traditionally used in credit scoring formulas unless the account turns negative. In such cases that this type of information ends up on credit reports as collection accounts which is harmful to FICO scores.
Negative Impact of Utilities on Credit Reports
Using gas, electric, cell phone and cable payments as part of FICO scoring means any LATE payment may end up hurting credit scores. The Americans most likely to be hurt and not helped by the new scoring formula would be low-income families living from paycheck to paycheck.
FICO scores are based on five factors: payment history, amounts owed, length of credit history, new credit and types of credit used. Payment history is the most important factor in FICO scores, accounting for 35 percent of a score. The scoring equation takes into account both negative and positive information on a consumer’s credit report. If you pay your bills even one day late it could lower your FICO score.
Chi Chi Wu, staff attorney for NCLC, expressed consumer advocates’ fears that using the additional information would “add millions of new negative reports to the credit reporting system and will actually harm more consumers, especially financially strapped consumers, by creating credit black marks.”
According to Wu’s testimony, consumers’ sporadic late utility payments are often the result of weather extremes. Consumers who see their bills spike in the winter or summer may not be able to pay those off in full during the season but will pay over time.
Consumers have long been protected by state utility commissions across the country when utility bills spike during weather extremes or when consumers can only make partial bill payments. There was no worry that monthly payment history, negative or positive, would become part of your credit reports.
Positive Impact of Utilities on Credit Reports
Unscoreable consumers or consumers with thin credit files have trouble getting credit products including housing, utilities or a cellphone. Some consumers may have already been affected by the new score. FICO says it has been working with 12 credit card issuers, which were not disclosed in the WSJ report, to test the new score in lending decisions since November 2014. The score is expected to be offered on a national scale by the end of the year, which will give lenders the ability to reliably score an additional 15 million consumers, according to FICO.
FICO says that under the revamped approach, nearly one-third of the newly scored individuals would have a score above 620 – typically the threshold in which credit card issuers and other lenders approve applications.
Jim Wehmann, an executive with FICO, tells the WSJ that the increase in consumers with higher scores is a “good indication that this is a process to onboard more consumers and allow them to maintain more creditworthiness.”
The new data would be furnished by database of telecommunications and utilities providers maintained by Equifax and the National Consumer Telecom & Utilities Exchange, while personal information would be furnished by LexisNexis.
FICO, Equifax and LexisNexis have begun a data score pilot program to measure the effects on consumers who currently do not have credit scores. The pilot is expected to be completed in the coming months and scores based on the alternative approach made available by the end of the year for use by credit card issuers.
The changes reported by the WSJ represent a huge shift in FICO. How consumers and the credit marketplace will be impacted remains to be seen.