New changes to the way credit scores are calculated could open up the market of potential borrowers, and bankers are welcoming the changes – for the most part.
The Fair Isaac Corp., more commonly known as FICO, is making several significant changes to its credit-scoring methods. The first, announced last August, will give less weight to medical debt collections. In announcing that change, FICO estimated that this would boost the median credit score for those consumers whose only black mark is a medical collection by about 25 points.
FICO also announced early this month that it was rolling out a pilot program that would use alternative data to identify creditworthy customers who might otherwise have a thin file. That alternative data would include things like rental payments and utility bill payments – things that aren’t necessarily “credit,” but which nonetheless demonstrate a potential borrower’s ability to meet his or her financial obligations.
Right now, that pilot program includes 12 major credit card issuers, which FICO has declined to name. In email correspondence with Banker & Tradesman, FICO’s senior director for scoring and predictive analysis said the pilot would be rolled out to all bankcard lenders later this year, though he did not have an exact date.
While the pilot program is meant to open up the market for credit card applications, providing credit scores to millions of consumers will ostensibly expand the market of those considered to be “bankable.”
Bankers, for the most part, felt the changes were a positive step.
“It’s terrible for someone to get turned down for a loan because they’ve never had a loan. This is particularly true for immigrant populations, or low- to moderate-income families,” said Robert M. Mahoney, president and CEO of Belmont Savings Bank. “They may have never owned a home, they may have paid cash for their car or they never had enough income to take on credit and they did exactly the right thing: they avoided credit.”
“And we do have people without credit scores in our market, and we do run into situations where we can’t get a credit score so we can’t make the loan,” he added.
Refining the way medical collections are analyzed with respect to a person’s credit score makes good sense, bankers said.
“I think the changes for credit score reporting were overdue,” said Glen White, chairman and CEO of Mutual Bank in Whitman. “Credit scores have become a lot more influential in the credit decision lately, so the more refined and accurate they can become, the better they will be in assessing the risk profile of the consumer.”
“I think that putting less emphasis on medical collections that have been paid makes a lot of sense. I think that it’s less a determination of how people are going to pay their other bills, because you’re often relying on somebody else to pay a portion of that and sometimes it takes time to get that worked out,” said Joe Nash, senior vice president of residential lending at East Boston Savings Bank.

Introducing: More Risk!
But Nash and others had mixed feelings about the introduction of alternative data as a means to establish a credit score for people with thin files. As Nash points out, that will help some people and hurt others. Paying a utility bill a day late might have an outsized impact on the resulting score, for instance.
And it will introduce more risk into the system.
“I have some degree of concern, but I think the good is going to outweigh the bad here with the ability to crack into that market, the ability for young people or people with thin credit files to obtain credit,” said Michael Rubin, a partner at Posternak Blankstein and Lund. “Is there some risk being introduced? Yeah. Is the risk probably manageable? Yeah, I think it’s manageable.”
Rubin, who has served on two bank boards and presently serves as a trustee at Eastern Bank, also points out that bankers are cautious by nature and not likely to adopt the new scoring methods anytime soon.
Finally, while the changes were largely heralded as positive, bankers may also be wondering, “Why now?”
Mahoney, for instance, remarked, “I think it’s a very worthy thing, but frankly, I don’t know what prompted it.”
While FICO’s spokesman said it was largely lenders who wanted these changes, Rubin had doubts.
“I’d find it hard to believe this was asked for by the lender side, being the traditionalists that they are,” he said. “But there are more and more young people today who aren’t able to buy anything and are renting, and when they’re renting, they have a hard time establishing credit. I can understand why the consumer would want this to happen.”