At some point in your life, if you apply for credit, you will benefit if you have a strong credit score. It could come in the form of getting a mortgage at the best rate available to purchase your first home (or landing any mortgage at all), approval on a solid travel credit card with no foreign transaction fees, a low APR car loan that allows you to purchase a vehicle to get to and from your first job, or even serve as a positive data point on your job application.
Ironically, those who have been financially responsible, without a prior need for credit, often have a difficult time getting access to credit. In my conversations with millennials, high income savers, self-employed individuals, and even early retirees, I hear this complaint all of the time.
The reason for this chicken/egg scenario, is that much of your credit score is based on your prior relationship with credit (i.e. how much credit you have access to, the average age of your accounts, your credit utilization ratio, your monthly payment history, etc.). If you don’t have a prior relationship with credit (or you have a bad one), you are likely going to be looked at as a high risk individual, and that risk will be reflected in a poor credit score and denials of credit.
Correcting for that is the premise behind the introduction of a new opt-in credit scoring model being introduced in early 2019 by the Fair Isaac Corporation, called UltraFICO.
What is an UltraFICO Score?
To understand an UltraFICO score, let’s first recap the traditional FICO score. A FICO score is the credit scoring model that most lenders use to judge your creditworthiness. When you look at the breakdown of what goes in to the traditional FICO score model, you can quickly see how it may leave gaps in diagnosing whether or not someone is worthy of credit:
Every single variable above is a reflection of your prior relationship with credit. No prior relationship with credit = a poor credit score (or no score at all). In fact, FICO claims that,
“Many consumers are still locked out of mainstream credit, including 79 million Americans who have sub-prime scores (680 or below) and 53 million Americans with not enough data on record for a FICO Score to be generated.”
Why? Some behaviors that would be a characteristic of credit-worthy individuals can go completely undetected. For example:
- Using a debit card instead of a credit card to make your purchases.
- Saving up significant funds over the years in checking/savings accounts that reduce the need for credit.
- Paying for tuition, cars, or other high ticket items with automated bill pay or check.
UltraFICO aims to change this credit scoring model flaw by also factoring in checking and saving account data into the model – neither of which is factored in with other scores. This could include balances, length of account history, transaction frequency, and overdraw history.
Credit applicants will be able to proactively opt-in to this data sharing and then choose which banking institutions they would like to add in by logging in within the UltraFICO app, similar to Mint.com or Personal Capital. Or, they may also be given the option to opt in at the time of application, as a second chance.
So, the question then becomes: should you use UltraFICO?
Should You Use UltraFICO?
FICO claims that,
“Seven out of 10 consumers who exhibit responsible financial behavior in their checking and savings accounts could improve their score with the UltraFICO™ Score.”
7 out of 10 ain’t bad. But what about the other 3 out of 10?
There does seem to be a risk with UltraFICO that you may be digging yourself an even deeper hole in trying to demonstrate your creditworthiness, by sharing bank account data that could show just the opposite. What is bad or good bank data is a bit of a black box, at least at this point in time.
Additionally, there are risks involved in voluntarily handing over even more of your data to the credit bureaus. For privacy reasons, adding bank account information to the trove of data that credit bureaus already have on you is unsettling. And it wasn’t long ago that the Equifax hack exposed the personal data of 145.5 million Americans.
In my opinion, I would recommend using UltraFICO only if it was absolutely necessary. When is it “absolutely necessary”? When you need the credit or could greatly benefit from it, but you have checked your FICO score and you have been denied credit or only been offered high APR rates because:
- You don’t have a score, for whatever reason.
- Your score falls into the “Poor” or “Not Good” categories below (the average FICO score recently hit a new high of 704):
If not “absolutely necessary”, you’re probably better off sticking with the old model and not taking on the added risk.