You know those car ads that say: "No credit? No problem! We have a deal that can still put you in a new car!"
But the deal turns out to be a loan with a 24 percent interest rate, more than three times the going rate for borrowers with a credit history.
Well, the days when car dealers, mortgage companies and other lenders can charge folks with no credit history those extraordinarily high interest rates may be numbered.
Fair Isaac Corp., the creator of the FICO credit score used by most lenders to determine a consumer's creditworthiness, has introduced a product that will take into account the payment history of the scoreless -- usually recent immigrants, people with low incomes, young adults and consumers who have relied on cash to pay for almost everything.
I have an 83-year-old aunt who falls into that last category. Despite the fact that she has a sizable bank account and no debt (since the mid-1970s probably), she couldn't get a telephone line installed when she moved to a senior-citizen apartment complex because she had no recent credit history. And when I say no credit history, I mean she isn't even in the credit bureaus' databases.
According to the TowerGroup, a financial research and consulting firm, and Fair Isaac, there are about 215 million credit-eligible adults in the United States. Of those, about 160 million have enough credit information to generate a credit score. The remaining consumers lack credit reports entirely or have credit reports with too little information to predict their credit risk.
With the new expanded score, Fair Isaac thinks it can generate a risk-based profile on 25 million consumers.
"This extension of the FICO score gives lenders and other businesses another powerful tool for building and growing their presence in high-demand and emerging markets, while expanding service options for consumers who have missed out on opportunities simply because they lack a traditional credit history," Tom Grudnowski, chief executive of Fair Isaac, said in a news release.
Many people have a limited credit history or no history at all because certain lenders, landlords and utility companies don't submit payment information about their customer base to the major credit bureaus.
But there are a number of credit repositories that service niche markets -- landlords and payday lenders, for instance -- that Fair Isaac will now try to tap to generate the expanded credit scores.
For example, the score might include information from these nontraditional databases on how an individual handled his or her checking account (in other words, do you frequently bounce checks?), rent and utility payment histories, and even rent-to-own transactions.
The expanded credit-scoring model will work like current FICO scores. Consumers will be ranked according to the likelihood that they will become severely delinquent (90 days or more past due on a credit account) in the 24 months following scoring. FICO Expansion Scores will range from 150 to 950. The higher your score, the more likely you will repay creditors as agreed, according to Fair Isaac.
If you're a consumer and you want to see what your expanded score is, you'll have to wait. It's now available only to businesses.
It will also take some time before the scores are widely used.
"Lenders are just learning about these scores and haven't begun using them to help make credit decisions," according to Craig Dillon, vice president of scoring solutions for Fair Isaac.
In rolling out its new credit score, Fair Isaac said 70 percent of the growth for lenders over the next five years could come from the underserved credit market. That could amount to $300 million in new credit card revenue and $3 billion in new mortgages.
But Catherine Williams, vice president of financial literacy for Money Management International, a consumer counseling organization, sees potential for problems.
Williams is concerned that this previously underserved market will be inundated with new credit applications once the scoring system is implemented.
"The good news is people with nontraditional credit payment histories will begin to come into the mainstream, but it's going to be vital that they have financial education," Williams said. "They just need to be aware of both the opportunities and pitfalls this new credit has for them."
Williams was, however, pleased that car buyers with limited or no credit history could be helped with the new FICO score.
"This may open the door for auto financing for that underserved market that may have cash for a down payment and can afford a monthly car payment, but their lack of credit history keeps them out of the more traditional car-buying market," she said. "So now they can get a better interest rate."
Ultimately, I think Fair Isaac's expanded scoring model may provide better credit opportunities for consumers who have good money-management habits. For too long this segment of the population has been shut out of getting the best deals because of limited or absent use of credit.
Join Michelle Singletary at 6:40 p.m. Monday on "Insight" with Stephanie Gaines-Bryant on WHUR, 96.3 FM. Singletary also discusses money on Tuesdays on NPR's "Day to Day" program and online at www.npr.org. Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or send e-mail to firstname.lastname@example.org. Comments and questions are welcome, but please note that they may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.