For a long time, people with low credit or no credit haven’t had a lot of options to improve their credit score, except to make debt payments on time—debt that they may or may not be able to obtain.
Really, improving a credit score can be a tough proposition for anyone who is trying to start from the beginning or start over, especially after suffering financial distress.
Folks in this position may soon have another option to raise their credit scores. Under a new scoring system, a person’s bank account balances and banking history could give their scores an additional boost.
The Fair Isaac Company, the creator of the most widely used credit scores, the FICO® Scores, designed a new scoring system. UltraFICOTM is rolling out in 2019 and according to FICO, the aim is to provide a more comprehensive understanding of a consumer’s financial profile.
They claim they will be able to do this by expanding their criteria for what makes someone “creditworthy” by taking into account their history of overdraft and checking, savings, and money market account balances.
With a new FICO score comes new FICO score rules. Below, we’ll cover the new FICO score changes as well as discuss who the new FICO score intends to benefit (and who it doesn’t).
How Does UltraFICO Work?
To know how UltraFICO will work, it helps to first understand the calculation method behind the current version of the FICO Score.
Although FICO keeps the exact calculation methodology a secret, a score between the range of 300 and 850 is awarded based on the following criteria:
• 35%: Debt payment history; so, whether a person is making debt payments on time
• 30%: Credit utilization, which is how much of your available revolving credit you’re using. Utilizing less of the available credit at any one given time is better than using more
• 15%: Length of credit history; a longer history is better
• 10%: New credit; New sources of credit can temporarily lower a credit score
• 10%: Types of credit; Managing a variety of types of credit successfully is rewarded
As you can see, FICO has a pretty specific formula based on the previous handling of debt. This score is used to determine who can access new credit, or credit at the best rates. And that’s exactly what’s at stake here.
A credit score can make or break someone’s ability to access a home loan or refinance their student loans. A credit score also determines the interest rate on many types of credit, which could result in the difference of thousands of dollars on a sizeable loan.
Sometimes, credit scores are even used for non-credit related reasons, such as renting an apartment. FICO—in partnership with Experian and fintech company Fincity—wanted to create another option for people who are financially responsible, but whose credit scores may not necessarily reflect that.
Say that a prospective borrower is sitting at a bank, trying to get approved for a mortgage loan. Depending on their credit score, they may or may not get approved. If they don’t qualify, they can try and work on improving their score or find a different bank.
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With the new UltraFICO Score, the borrower may have another option. If their base FICO Score doesn’t yield the result they are looking for, or if they don’t yet have a FICO Score, a participating lender could offer to pull their UltraFICO score. (The UltraFICO score won’t be pulled without permission from the borrower.)
The UltraFICO Score will pull information from a person’s checking, savings, and money market accounts—you get to choose the data you share—to supplement the information that is already considered for your credit score.
If you already have a credit score, it will be updated with the new information. If you do not have a credit score, a new one will be generated. Similar to other FICO Scores, you will receive a score between 300 and 850.
When bank account information is pulled, two primary factors are being looked at: average account balance and history of overdrawn accounts. If you have more than $400 in your account, and there is no history of a negative balance in the previous three months, your score could improve.
The new FICO score rules will also consider whether a person has more deposits than outflows, the account’s length of history, and if the accounts are regularly used to pay bills, such as utilities.
Experian, one of the three primary credit bureaus, will gather a person’s bank account information using Finicity, which is a financial technology company and data aggregator. Upon request, they will send this information to the requesting bank, along with summaries of the bank accounts an individual willingly includes.
Who Will UltraFICO Benefit?
According to FICO’s website , the score will “attract the underbanked—the self-employed, millennials, immigrant entrepreneur, migrant savers and remitters” and give people who “may have suffered financial distress but are recovering” the opportunity to bounce back and try again.
Their website continues: “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.”
UltraFICO estimates that “seven out of 10 consumers who exhibit responsible financial behavior in their checking and savings accounts could improve their score.” They expect that some consumers could see their base FICO score increase by as much as 20 points.
Of course, it is possible to have a score that decreases upon pulling banking information. At this point, it is up to the bank to determine which score they will use to offer credit.
What Happens Next
The pilot program for the new FICO score rules is supposed to launch early 2019 , with the hopes of having the scoring system available to all lenders by the summer of 2019. The Pentagon Federal Credit Union, the third-largest credit union by housed assets, will run the pilot program.
Whether the score actually gets used widely will likely be determined by the lenders themselves. UltraFICO, like FICO, is simply one of many tools at a lender’s disposal.
Each lender will still have its own rules about how and to whom they offer credit, and the UltraFICO score may or may not fit in with their methodology.
If for whatever reason your credit score isn’t up to par, the new FICO score changes may be your ticket to helping score a better interest rate, or getting approved for a loan that was previously unattainable.
This is the biggest change to FICO scores in decades, and hopefully it will work to help the people that it intends to help. Having access to credit can mean the difference of home ownership, private student loans, business loans, and personal loans. When used correctly, credit can be a powerful tool to build a great life.
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