You already know to think twice before posting pictures and stories about your wild Saturday night to Facebook. Recent headlines like this one in The Financial Times might have given you more reason to hold off:
Not so fast, says FICO, the most widely used credit score.
What it and others in the industry are doing instead is looking at alternative data, such as phone and utility bills and property and other public records, in addition to the traditional sources used to determine a credit score, like credit card, mortgage and auto loan payments.
That shouldn’t scare consumers. In fact, they’re being developed so more people with thin credit histories, such as young adults and recent immigrants, can have a traditional credit score and qualify for loans.
Roughly 53 million Americans don’t have enough payment information in their credit bureau files for FICO to calculate a credit score, said FICO spokeswoman Christina Goethe. But in a pilot program of its new method — dubbed FICO Score XD — millions of these consumers obtained at least a 620 score, which is high enough to qualify for many loans.
“FICO Score XD can be a lifeline for millions of previously unscoreable people,” Goethe said in an email. “A majority go on to maintain good credit and achieve high traditional FICO scores.”
Individuals who receive high scores regularly paid phone and utility bills and hadn’t given any indications of problems paying rent.
As much as alternative data can help, it also comes with a catch. “If the applicant looks more risky with alternative data then he or she may be denied or receive a higher rate as part of the offer. Considering new data isn’t always about awarding consumers with higher scores. It’s about a more accurate assessment, for better or worse,” credit expert John Ulzheimer, who used to work for FICO and Equifax, said in an email.
But even if FICO isn’t using social media data now, that doesn’t mean it won’t in the future. “If you look at how many times a person says ‘wasted’ in their profile, it has some value in predicting whether they’re going to repay their debt,” FICO CEO Will Lansing told the Financial Times in a report last week.
TransUnion, one of the three main credit reporting companies, also is expanding its use of certain data — but not from social media — to help people with slim records get loans. Its CreditVision score includes more historical payment information along with payment amounts in its calculations. A study by the company in March found the new method scored an additional 26.5 million people who could not be scored before.
Credit reporting agency Experian found in a study earlier this year that the number of consumers with subprime credit scores dropped by 20 percent when rental payments were included in the credit scores.
These new procedures are in response to concerns from banks that by turning down people without a traditional credit score, they’re rejecting potential sources of profit. Banks are searching for new sources of revenue as low interest rates and reduced demand are hurting their revenue and profits.
While alternative data is a useful way to help those with a thin credit score, banks aren’t convinced it’s better than the traditional method and will most likely use it as a supplement. “Banks would rather make decisions using a garden variety credit report with a score,” Ulzheimer said in an email.
It still might not be the best idea to post about a crazy night on Facebook, but you can rest easy knowing that if you do, your credit score won’t be affected — yet.