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Since the early 1990’s, lenders have based about 90% of their decision on whether or not to extend you a line of credit based on the credit model: The FICO score. This is a score that calculates how many lines of credit you have open, how much of that you actually use, how long you’ve had them open, and how often you’ve paid them off on time.
But now that could change: introducing the Ultra FICO! The idea behind this is to allow lenders to extend credit to MORE borrowers by taking into account the borrow’s history of cash transactions in their bank account. This new scoring method will consider how borrowers manage their checking, savings, and money market accounts…it’ll look at the average balance and whether or not the account has ever been withdrawn.
Lets FIRST start with the good things:
Used properly, this could REALLY help out the people who have been caught in the credit card twilight zone of not having credit because they’ve just never needed it. This NEW scoring method would give people like this the ability to potentially get a credit card, mortgage, or other loans because they have a history of otherwise properly managing their finances. Or maybe it’s for the people who only have ONE credit card, have always paid it off on time, but they don’t have ENOUGH credit to get them approved for a loan. This Ultra FICO model has the potential to extend credit to those who otherwise couldn’t get it.
However, I see THIS as a way for banks to begin loosening regulations and to expand the market to who they can lend money too. Many regulators have also expressed interest in exploring ways to increase access to affordable lending for consumers who have no or low credit scores. As I mentioned a previous video, I personally believe we’re seeing the economy beginning to normalize and cool off from the insane growth we’ve been seeing over the last few years, which I think is a good thing and a healthy way for an economy to act. But what we might start seeing, instead, is regulators allowing MORE people to get loans and further increasing prices…just a little bit longer.
But my concern is, at what point does it stop? The more people who have access to loans, the riskier our market will become, and the higher the chances of them defaulting on payments. My other concern is that it appears as though the requirements for The Ultra FICO are absurdly low…it’s said that “Consumers with an average balance of at least $400 who haven’t overdrawn in the prior three months would likely get a boost.”
But here’s the reality: For the right people, in the right hands, I’m all for this. I know many, many responsible people who just decided not to play the credit card game because they never needed to, and those people are undeservingly hurt when it comes to getting a loan.
FICO says this is really a way just to fill in the cracks of an underserved market, and a way to ease up lending to those individuals. They say it isn’t meant to weed out applicants. Rather, it is designed to boost the number of approvals for credit cards, personal loans, and other debt by taking into account a borrower’s history of cash transactions, which could indicate how likely they are to repay.
But we’ll see, I have a feeling this will have a minimal impact overall…but I do think it sets the precedent that we’re going to continue easing up on regulations, especially at a time where we’re coming off such a great bull market and healthy economy…and that is a bit risky.
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