FICO Looks to Other Data Points for Scoring

What do you do if you're financially responsible but don't have a credit score? How do you get started on the path to homeownership if your score is low due to traditional credit reporting? FICO believes it might have the answer. (Others think it might not.) Here's what you need to know.

If you're in the market for a home, you're probably in the market for a mortgage. Except for all-cash buyers, most buyers will soon find out their FICO score and what banks think about it.

The FICO score greatly impacts whether or not lenders consider you an acceptable credit risk, and yet there are more than 53 million Americans out there who don't have a credit score at all. This doesn't mean they're a bad risk, necessarily... it just means they haven't used credit cards, held a previous mortgage, or had an auto loan. They may be perfectly responsible financial citizens. So how do they apply for a mortgage?

To broaden access, FICO has begun to factor in new data sources. Announced in April 2015, FICO will now include two additional references: A national utility database presided over by Equifax, and LexisNexis, which relies on public records. 

The idea behind the change is this: First, the timeliness of utility payments can be used as month-to-month evidence of financial health. Second, FICO will look at LexisNexis address changes to determine how often people have relocated. In theory, frequent moves may be an indication of increased risk.

Though the impulse may be good, the changes are not without some controversy. Some argue the accuracy of the Equifax database may be a concern. It also adds one more credit reporting database, which must be monitored. There's also a worry that the "frequency of move" may unfairly punish people and provide a disincentive for relocations, downsizing, and upsizing of homes, provided FICO only uses the LexisNexis information in a punitive way. 

More details are sure to emerge, but one thing is for sure: The era of Big Data in the cloud will be sure to cast its shadow on how financial institutions assess risk in the years ahead. One hopes that they ultimately let in more sunshine than shade when it comes to helping buyers attain the dream of homeownership.

Are you ready to explore the dream? Contact me today. I'd be happy to help you navigate the home-buying or selling journey.

This post has been authored by Eric Slifkin, REALTOR® serving South Florida's Treasure Coast. You can reach me at 888-288-1765 or visit my Web site. As your resource for information on new or resale homes throughout the Treasure Coast, please be sure to contact me about any home you may find on the Web, yard sign, or ad, and I will research the property, arrange showings and handle all the details.