When the FICO score was introduced into consumer credit markets more than 30 years ago, it represented a sea change for lenders looking for a more accurate way to evaluate credit risk.
It provided lenders a tool designed to extend credit to consumers objectively and safely based on relevant credit report data, without the influence of subjective human judgment or biases. In the decades since its introduction, the FICO score has evolved to incorporate new data sources to help more Americans build a credit profile and have access to the financial system.
Today, the vast majority of Americans have a FICO score, either built on traditional credit bureau data alone or using alternative data sources, such as cellphone payment records or cash-flow data.
As we begin to emerge from the coronavirus pandemic, it will be more important than ever for lenders to have a more comprehensive and inclusive picture of how Americans have been managing their financial health — even in extraordinary circumstances — beyond what’s seen in the traditional credit bureau file alone.
The FICO score has incorporated rental and cellphone payment data in traditional credit scores and reports for many years. But unfortunately, very little of this data is reported to the credit bureaus.
The use of alternative data (beyond the traditional credit reports) is not a new concept for FICO. As an independent data analytics company, FICO has researched and offered scores based on alternative data for a number of years, leveraging regulatory-compliant data such as cellular, cable and telephone records. More than 92% of U.S. adults have a cellphone, according to an independent report by FinRegLab and Charles River Associates. Leveraging this type of alternative data can help generate FICO scores for millions of consumers who did not previously have one based on traditional credit bureau data.
Another promising area in alternative data is cash-flow information. More than 96% of U.S. households have a bank or prepaid account, according to that same report. In recent years consumers have been able to enhance their FICO score by demonstrating their positive financial behavior as reflected in their checking, savings and money market accounts.
Still, it is equally critical that the incorporation of alternative data into underwriting is done in a manner that is both fair and transparent. Vast collections of data are now available about American consumers, including everything from where they attended college to what kinds of websites they visit.
Along with these new sources of data are emerging enterprises touting their ability to use new and nontraditional data to evaluate consumer credit, and issue loans to millions of new borrowers.
But not all data is equal. And without the application of tested safeguards, using such data can run the risk of worsening the very problems of credit access that we seek to solve.
For example, FICO administers a six-point test designed to ensure data is compliant, deep, broad, accurate, predictive and adds value beyond data sources that are already available.
By integrating these new data sources into the score that the majority of lenders use and consumers understand, the credit ecosystem can evolve in a way that benefits all stakeholders.
As the recovery from the pandemic continues, it is critically important for Americans to have an opportunity to learn about their FICO score and how their financial behavior affects it.
Since 2013, consumers have been able to check their FICO score free through their financial provider. Now, more than 200 financial institutions participate in that program.
With 90% of top lenders using the FICO score, programs like this are essential to helping consumers see the same score that their lenders use. FICO also partners with nonprofits to provide free credit counseling to more Americans, prioritizing diverse communities that have been historically underserved.
Millions of consumers rely on their FICO score for their financial future, and we don’t take that responsibility lightly.
Alternative data, when integrated with traditional credit scoring, holds the key to responsibly expanding access to credit for more Americans. The challenge for policymakers is how to incorporate it in a safe, regulated manner.
