For years, many consumers have faced a catch-22 when it comes to getting credit. To qualify for a credit card or obtain another type of loan, you typically need to have a credit history to show lenders that you’re responsible and able to pay off debt. But it’s hard to build a solid credit history if you can’t get credit in the first place. Recent changes to the way the Fair Isaac Corporation, or FICO, determines credit scores could change that, potentially giving millions more Americans access to credit.
In early April, FICO announced that it was partnering with Equifax and LexisNexis to gather data about consumers’ past payments on utility and cellphone bills, as well as how frequently they change addresses. FICO plans to use that information to develop credit scores for up to 15 million people who don’t currently have enough information in their credit report to generate a score.
The program is currently in its pilot stages, with 12 of the biggest issuers of credit cards using the new data to make decisions about offering credit. So far, the program has been a success, according to FICO, which plans to roll out the score to more lenders later in the year.
“FICO’s focus is on expanding access to credit; not simply scoring more people,” said Jim Wehmann, FICO’s executive vice president for scores, in a statement. “Our approach also addresses a paradox for people seeking their first traditional credit product — you often need a credit history before you can get traditional credit.”
The new approach to scoring is welcome news to credit card issuers and other financial institutions that are looking for a way to “bring millions of consumers into the financial mainstream,” per a statement from Rick Trainor, CEO of LexisNexis Risk Solutions. By broadening the pool of people who are eligible for credit, these companies can expand their customer base. Financially responsible consumers who are struggling to prove their creditworthiness may also benefit.
Ninety percent of Americans currently own a cellphone, according to the Pew Research Center. In comparison, just 71% have a credit card, according to a Gallup poll, down 7% since 2008. Some of those people may be credit-free by choice, but others may want credit and are unable to get it because of a sparse credit history. By looking at whether those people are able to pay cellphone or cable bills on time, card issuers may be able to offer credit to a wider swath of consumers, possibly on better terms than they would have been able to get elsewhere.
The move to include data about cellphone and utility payments in credit scores could have unintended consequences, though. Consumer advocates have lobbied against considering utility payments when computing credit scores, the Consumerist reported. The National Consumer Law Center has argued that low-income consumers who fall behind on utility bills in the winter or summer, when energy costs typically spike, may end up with black marks on their credit history as a result, even if they later make up the payments. The bad credit history that results “can often be worse than no credit history,” the NCLC points out.
Consumers often struggle to pay cellphone bills as well. A little less than half of people whom the Pew Research Center identified as “smartphone dependent” (the 20% of U.S. adults who said their phone was their primary way of accessing the Internet) said that they had been forced to cancel or shut off their service because they couldn’t afford to pay the bill. People who fall behind on their cellphone bills may end up with a lower credit score, while it’s possible that those who cancel their service periodically may end up with a spotty history that could also affect their score.
People who move around a lot may also end up with less-than-stellar credit score under this new system. “Address history speaks to consumer stability,” David Shellenberger, FICO’s senior director for scoring and predictive analytics, told CNN. Yet the very people who are left out of current credit scoring models are also relatively mobile. It’s not clear how frequently a person would have to move for it to ding his or her credit score, but there’s little doubt that including such a factor in the calculation could hurt young people and renters, who change addresses more frequently than most other groups, according to U.S. Census data.
These new credit scores are a work in progress, and a number of kinks will have to be worked out before they enjoy widespread adoption. For now, consumers who already have a FICO score probably won’t be affected by the changes, as CNN reports that the new scores will be separate from current ones. But consumers with little or no credit history may want to start paying extra attention to paying their cellphone and electric bills on time, since this data could soon have a major effect on their financial future.