Diving Deeper Into Your FICO Score

If you are among the millions of people applying for an auto loan this year, the first thing any lender is going to want to know about you is your credit score. It’s the magic number that determines who will lend to you and set the terms of the loan. As you probably know, your credit score is a number assigned to you based on your credit history. And if you’ve been savvy about it, you’ve likely spent time monitoring your score from the big three credit agencies, Equifax, TransUnion and Experian.

But it may come as a surprise to know that almost 19 million Americans don’t have enough credit history to be assigned a score. And aside from those with insufficient data to have a credit score, there is an even higher number of consumers who are basically credit-invisible: having no credit history at all. Among millennials, the percentage who don’t have a credit card at all is about 30 percent, according to a 2015 survey. What about these consumers who have the need apply for an auto loan but don’t have a credit score: do lenders leave them out of the borrowing pool entirely?

The credit history you don’t know about.

The trend today says no. Lenders are beginning to investigate personal data about consumers that goes outside of traditional credit reporting agencies. This information combined with normal credit agency reports can help determine creditworthiness for loan applicants without enough credit history. An example of this would be regular phone bills, rent or any expense paid on a monthly or annual basis. These are the things that would never show up on a typical credit report but can impact your credit history.

Almost anyone can find a way to establish a record of paying for a monthly service- whether it’s cable service, a gym membership or a cell phone. A monthly telecom bill is one of the most well-known alternative ways for consumers to be evaluated. Thanks to telecom, even the most credit-invisible among us has likely been able to establish some kind of record through cell phone payments. The credit reporting bureaus can take this information and add it to help form a record of credit. This can be helpful for those who are applying for a loan who haven’t had access to traditional credit. If you’ve consistently paid these types of monthly personal expenses on time, it can help the lender determine that you’re a safe bet as a borrower and even help reduce your interest rate.

Alternative ways to score your credit.

Agencies such as Experian are increasingly able to use other personal data as well to paint a fuller picture of the consumer. FICO, which dominates the credit world, has partnered with LexisNexis, and Equifax to combine this sort of public data with to form a new scoring model called FICO Score XD. For this score, a consumer’s background of utilities and telecom account and property records is provided by the National Consumer Telecom & Utilities Exchange. A score between 350 and 800 is assigned based on that data. Using alternative credit information can also encompass verifying a consumer’s income and employment in order to take those factors into account early in the process of applying for a loan.

Other companies are experimenting with ways to formulate a credit score based on similar data and combining what they find with other agencies to develop new models of scoring. While this can be confusing for consumers, since each agency has its own scoring criteria, it still makes it possible for a wider pool of consumers to be considered for a loan. “LexisNexis data, which the financial services industry has trusted for more than 40 years, provides additional insights about creditworthiness that can help bring millions of consumers into the financial mainstream,” said Rick Trainor, CEO, LexisNexis Risk Solutions. In this way, it’s a positive for lenders because it widens the market of consumers who they would like to extend credit to.

The expanding consumer market.

Still, the trend of incorporating this kind of consumer data is new and largely untested. It could expose lenders to more risk as they try to spread their services to low or no-credit consumers in an underserved market. However, TransUnion, one of the major reporting agencies reported a correlation between a consumer’s alternative credit payment record and their future auto loan payment performance, indicating that the data in fact can be used a reliable predictor in these cases. As long as these strategies are available to assess consumers, and as long as these new consumers are able to show a consistent payment history, scoring through alternative credit is likely to pick up pace. For those who have had challenges borrowing money this all-encompassing method of scoring can open up new channels of credit and help strengthen a traditional credit score in the process.