When new credit scores come to light, it shakes up the credit world a bit. The new UltraFICO score is no exception.
In fact, this score is so different, it has the attention of consumers and just about every credit expert (raising their hand) on the planet. It’s intriguing because it gives a certain segment of consumers a little more power over their own credit.
The UltraFICO score examines financial behavior, such as checking and savings accounts, that has never been considered for FICO credit scores before. FICO has been pretty transparent about how this new score works, and it’s billed as “The Score You To build.”
I love the power of consumers, but there is also a potential side effect of this new score which is a bit annoying. I’ll get to that, but first let’s see how the UltraFICO score works.
How the UltraFICO score works
The UltraFICO score is unique because it is an “opt-in” FICO score. When a lender requests your FICO score from a credit bureau, your score is calculated based on the information in your credit report. If your credit is limited or you are rebuilding your credit, your credit score will likely be too low to be approved for many types of credit.
In this scenario, the lender may request a recalculation using the UltraFICO score. It is the same number range like the FICO score, 300-850, but the new score takes into account your banking activity. If you have a score in the gray area, from the top 500 to the bottom 600, according to FICO, the recalculation could increase your score enough to get you approved.
To opt for a recalculation using the UltraFICO score, you must meet the following criteria:
- You have not had any negative account balances in the past three months.
- You have an average balance of $ 400 in savings over the past three months.
- You apply for credit from a lender who uses Experian for a credit report and credit score. Experian is the only one of three big credits offices currently offers a recalculation using the UltraFICO score.
FICO estimates that 70 percent of consumers with no or limited credit who meet the above account criteria would see their scores increase.
FICO anticipates a smooth launch of the UltraFICO score in early 2019. This “pilot” phase is designed to determine how well the score is performing in practice. But it’s also a test to see what consumers think about sharing more of their financial data. The sheet music should be more widely available in summer 2019.
What’s good about the UltraFICO score
If you already have a good to excellent FICO score, this will not increase your score. But it helps a group of consumers who fall into that gray area that I just mentioned.
Here’s who the UltraFICO score helps the most:
- Consumers with limited or at-risk credit, such as young people, recent college graduates, and immigrants. A TransUnion survey as of 2015 showed that 43% of millennials had subprime loans. The first credit score is around 670, depending on the lender.
- Consumers who are rebuilding their credit rating. This may be due to irresponsible behavior or to circumstances beyond their control, such as job loss or medical bills.
Let’s say you have a FICO score of 620, but your lender demands a prime credit score. The lender looks at your FICO score of 620 and knows it’s not high enough to approve your loan or credit card application. If you meet the previously mentioned criteria with your bank accounts, the lender may request a recalculation of your score using the UltraFICO score.
It’s possible that a score overhaul will help you get approved. Sounds pretty idyllic, right? Well, only if you assume that a traditional FICO score doesn’t really represent that consumer’s reality.
But what if the score was good the first time around? Let’s take a look at the back of this new score.
What is (potentially) bad about the UltraFICO score
Here is the assumption behind this score: If you manage your bank accounts well and have some savings, then you have better credit risk than your “regular” FICO score implies.
Do you know what’s bothering me? The ability to manage cash well does not always translate into good credit management. I see them as two different skill sets. And having $ 400 in your savings account isn’t much. There will be consumers approved through the UltraFICO score who are really not good candidates for credit at this point in their lives.
Now I don’t want to be depressing because I’m really happy that some deserving consumers have the chance to shine. And these people will be well on their way to achieving a great score, including all the benefits that come with great credit.
But FICO score algorithms were designed to measure credit risk. The UltraFICO score can be used to primarily replace the results of the initial FICO score calculation.
There will be times when it will work as expected and it will turn out fine. But I think it’s also important to have the big picture and to have realistic expectations. There will also be times when giving someone credit a little prematurely might not happen at all.