Credit card issuers and other lenders are desperate. Their profits have stagnated. Credit card debt has reached the same level as in 2008, about $1 trillion. That means, asTed Rossman of creditcards.com says, the lending market is saturated. Where to get more business?
The lenders came up with an idea and pushed it on Fair Isaac Corporation, author of the FICO score. Seven million people have too-thin a credit history or scores too low (the high 500s or low 600s) to be of any interest to lenders. But the lenders still want more business and that possible market of that 7 million people makes lenders’ mouths water. So what they proposed to Fair Isaac is that they add bank account information to the mix.
FICO, which depends on lenders paying for credit reports they pull for their income, complied and came up with Ultra FICO, a program that will include taking into consideration bank accounts both checking and savings. If someone in the previous three months kept a savings account balance of an average of $400 and hasn’t bounced a check, he or she could be in luck and get a bump in his or her credit score that just might get that person a brand new credit card.
The credit card industry has a huge upside here. Where those people with excellent credit can get interest rates below 10 percent, figure these new people will pay upwards of 29 percent. Besides, many people with a top-of-the-line credit score pay off their credit cards every month, so the credit card issuers don’t make a dime off interest. Wow! Just think of it, 29 percent interest on, say, a $1,000 balance. That’s a payment of about $34 a month, most of which goes to interest, pure profit for the credit card company. And even if only 3 million people were to take advantage of this new opportunity, that’s conservatively $102.5 million a month in income that they didn’t have before.
Of course, that could be a big savings for some people who depend now on payday lenders who may charge up to 400 percent interest, pawn shops, and loan sharks who may not be as forgiving as either payday lenders or certainly credit card issuers.
This program, which will roll out in early 2019 with just few lenders and available only through Experian, is entirely voluntary for possible customers. But count on lenders to push the program with TV and radio ads, touting its benefits to today’s non-credit worthy.
One wrinkle no one has mentioned is that at present, FICO scores do not take into consideration anyone’s income. Pay your bills on time, have adequate available credit over an acceptable length of time, and you get a good credit score. Income is left off the mix. But bank records imply income. All someone has to do is look at the amounts of deposits to get an idea of how much money someone earns. Ted Rossman points out “Historically your FICO score has been affected by how well you manage your money, not how much money you have.”
Then there’s the sharing of data. Maureen Mahoney of Consumers’ Union warns “Participating in this program involves sharing very sensitive banking information with third parties, so consumers should keep that in mind before” signing up. And once lenders have that information, who will they sell it to?
Acceptance of this new FICO score could be a long way off, though. Only a few lenders are going to use it in the beginning. Fact is, many lenders don’t even use the latest FICO scoring models, FICO 9, which discounts the importance of medical debts and may include rent payments, or FICO XD, which adds utility payment and public records to credit files.
Thus, FICO Ultra will not be available to employers and landlords in the beginning, even though it might be a better predictor of how well someone will pay bills than an old-style credit report might be. After all, if someone religiously pays the rent and has some money in the bank, figure that’s a positive sign. The only thing to be concerned with is unaffordable car payments that could result in repossessions that could result in not being able to get to work. But if someone doesn’t have existing credit, the likelihood of having a car payment is slim.
Yes, lenders are getting desperate and there’s a huge, untapped potential market that they want to figure out how to grant credit to. Their problem will be how to ensure that this untapped market actually pays its bills once it get those credit cards and car payments.
We’ll have to wait and see because many people simply don’t want to use credit, don’t want anyone interfering in their financial lives, and are content with paying cash. At present there are some 24 million households who are considered “underbanked,” meaning they have checking accounts but use other financial “tools” such as pawn shops, check-cashing stores, and/or payday or auto title loans. Most say they don’t have enough money to open and keep a checking account. Then there are the “unbanked,” some 9 million households. They may never have applied for or applied for credit from a bank because they feared rejection or applied and have been rejected.. They also use the same “tools” as the underbanked. They use cash or prepaid debit cards and lenders are out of luck.
These are the people whom lenders want to sign up. They see an opportunity what with their bumping up against the maximum of the market they have now.
By Robert L. Cain
