Fintech Wants To Change The Consumer Credit System

Last Update: August 11, 2021 • Credit Report • Financial News •

You’ll need a “good” credit score to rent an apartment or home, qualify for a personal loan or mortgage, and (in some states) get a job with an established company. However, credit scores rely heavily on a set of information that doesn’t consider a person’s history of paying their rent on time, their willingness and ability to start a successful business, or their unwillingness to go into debt to prove that they can handle debt.

While many metrics could prove creditworthiness, FICO is the go-to source of information for a large majority of banks and institutions that want a snapshot of a consumer’s financial history and behavior.

According to the Consumer Financial Protection Bureau, about 23 million Americans have a limited credit history. There isn’t enough information that meets FICO’s requirements to calculate many potential borrowers’ likelihood of paying their debts on time.

History of The FICO Score

Bill Fair and Earl Issac built the framework for the FICO credit score in the late 1980s. Intending to find a way to regulate creditworthiness easily, the engineer and mathematician pair wanted to create a single source for thousands of lenders who wanted a snapshot of a consumer’s financial activity as it related to loans and lines of credit.

The FICO score sought to standardize the way we determine the likelihood that a borrower will pay back debt as promised.

In 1989, the FICO score became popular with Experian, Equifax, and TransUnion. It offered consumers a new standard financial identity tied to a proprietary score-producing algorithm.

What is a FICO Score?

According to FICO, a credit score is based on the following criteria:

10% is how many companies have recently looked at your credit report
10% is the different types of credit you have
15% is the age of your oldest credit account
30% is the total amount of your debt
35% is your history of on-time and late payments

The Problem With FICO Scores

With a FICO score, standardized credit scores make accessing loans and lines of credit more equitable than the old (pre-80s) way of convincing a bank executive to trust that you’ll pay back a loan as promised.

The problem with the FICO score is that it’s based on information that the consumer can’t change. They don’t give permission for a FICO score to be calculated and attached to their name and social security number. When false information informs a FICO score, it’s difficult and time-consuming for a consumer to change that information and get a corrected FICO score.
New credit scoring models could expand access for consumers

Credit risk models like the one used by VantageScore look at established credit patterns. It goes beyond typical metrics like credit usage rate or debt-to-income ratio to see if a consumer has established a clear pattern of good financial behavior, like repaying loans and lines of credit on time.

This type of expanded credit scoring model could ease credit-building restrictions. Consumers may no longer need to open a credit card to establish a payment history. New credit-risk models look closely at utility bill payment history, a borrower’s ability to repay a loan, willingness to make payments as promised based on history, identity verification to reduce fraud, and mobile phone usage patterns.

New credit scoring models could democratize credit access for consumers who can’t currently access loans and lines of credit due to a non-existent or low FICO score.

Fintech Democratizes Credit for Consumers

Several companies allow consumers to connect their bank accounts, payroll data, and multiple income streams to institutions granting credit and loans. FICO scores update once every 30 days and omit important details about how long a consumer has maintained stable employment, how much money they make, and how faithfully they pay their routine bills like cell phone service, rent, and utilities.

Experian Boost connects to a consumer’s bank account (with permission) to track on-time payments for everyday necessities outside of the lending industry. Consumers can get a literal credit score “boost” if their bank participates in Experian Boost.

Mint lets users connect their payroll apps and other sources of income to provide a more comprehensive view of their finances. Payroll data like the length of employment could provide valuable insight into a consumer’s ability to make timely loan payments.

People who’ve recently moved to the United States from another country may have a tough time establishing credit. New companies like Stilt help immigrants establish the credit they need to get loans.

FICO Scores Could Soon Be Obsolete

FICO scores represent an antiquated way of judging a consumer’s ability and willingness to pay back their loans and lines of credit on time. FICO updates its records only once each month. They update their algorithm every few years.

Fintech can use different data types to help paint a complete picture of a consumer’s current financial situation. A FICO score may contain information that’s five or even ten years old and has no bearing on a person’s current finances.

Currently, FICO isn’t using the power of fintech to update its processes, systems, and score criteria in a way that would benefit both consumers and lenders. Without the ability to work with fintech companies to stay relevant, the FICO score could soon be a relic of our society’s financial past.

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Rachel Morey

Rachel Morey is a journalist specializing in automotive, insurance, and finance content. She has been writing professionally for nearly a decade and has projects in print and broadcasting. A native Iowan, Rachel as a special fondness for the open roads of rural America.

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