The FICO (Fair Isaac Corp) score. That all important number lenders use to assess a borrower’s creditworthiness may soon involve information other than your credit history when calculating your credit score. Lenders, in an attempt to develop a more “well rounded” picture of a person’s finances, now want to include payday loans, evictions, child support payments, utility and even cell phone payments to the information considered when determining whether or not to loan you money. Whether you pay off a payday loan on time is not the issue. The belief is that if you use a payday loan service you represent a greater risk of default. Commissioned sales people like REALTOR’s may at times use a commission advance service when they have a pending transaction. Should this be used against them when applying for credit?
Last month the big three credit reporting agencies (Experian, Trans Union, and Equifax) began providing estimates of consumer income as a credit report option. Estimates of income?? Will these “estimates” be as accurate as the Zillow “Zestimates” of home values which are notoriously inaccurate? Will the estimated income be used to prepare debt to income ratios? Since a lender will require income verification during loan processing why is an estimated income being factored into the credit score?
What has yet to be explained is how these factors will be scored. If you do not have derogatory entries in these areas will it improve your score or will the information only be used to reduce your score if you do? This is an important question since one of the reasons touted by lenders for gathering this information is to be able to increase loan volume by offering credit to borrowers with thin files. If this is true then why should this information be used for borrowers with ample credit histories? Since the average FICO scores of homebuyers who qualify for loans continues to rise could it be that lenders are looking for other reasons to tack on extra fees or charge higher rates?
The FICO score is a tool used by all businesses who base their rates, fees, deposit requirements and even hiring decisions on the perceived risk of the customer or applicant. This includes insurance companies, public utilities, cell phones, cable TV, etc.
Will this added information accurately reflect the rate of default? Should there be limits on what information is used or even when, where and how the FICO score can be used? Since the FICO score can affect almost every aspect of our lives I think we need to be careful about what factors are used in calculating it. The last thing a struggling real estate market and economy need are more obstacles to obtaining financing and credit.