The Washington PostDemocracy Dies in Darkness

A new kind of credit score for those with no credit

Andrew Harrer/Bloomberg

In the finance world there is what’s known as the Catch-22 of credit.

Only those consumers who already have loans and make payments that show up on their credit report can get a credit score to help prove their trustworthiness to financial companies. Those who work mostly in cash but want greater access to credit are often locked out of the lending market because financial institutions don’t have enough information to evaluate them.

In other words, it takes credit to get credit.

Now some leaders in the credit space are trying to create new models for rating consumers. The new scores look at traits and payment histories that don’t show up on traditional credit reports. The premise is that millions of consumers without credit profiles are still creditworthy — earning regular paychecks and paying their bills on time.

The latest move comes from Fair Isaac Corp., the developer of the FICO score, the most widely used credit scoring formula in the country. The company said Wednesday that it is developing a new credit scoring model for the millions of people with weak or no credit histories who are now considered “unscorable.”

As first reported by the Wall Street Journal, the firm will use information on payment history for cellphone bills, cable service, gas and electricity provided by Equifax to calculate a credit score for those consumers. It will also use public records information from LexisNexis Risk Solutions to pull information on a person’s property and details on how long they’ve lived at a particular address.

Generally, staying longer at an address may be viewed as a sign of stability and can be used as a gauge for whether that person is keeping up with rent payments. The goal is to bring in more “positive” data that may not show up on a credit report the way foreclosures and property liens do, says Ankush Tewari, who manages the credit risk business for LexisNexis.

Fair Isaac says the data it uses would make it possible to evaluate 15 million consumers of the 53 million who don’t have a credit score. About 200 million consumers have FICO scores, according to the firm.

About a third of those 15 million consumers would get scores of 620 or above, says Jim Wehmann, an executive vice president with Fair Isaac. The new model would have the same range as the traditional FICO score of 300 to 850. FICO scores are used in 90 percent of lending decisions, according to the firm.

Some consumers who are struggling to rebuild their credit after the financial crisis may be able to use the score to re-enter the financial market, Wehmann said. Immigrants and young consumers who have had trouble accessing credit may also gain scores. The firm is working on a pilot program but hopes the score will be made available to lenders by the end of the year.

Lack of credit history is often viewed as a form of risk, since lenders are often left with little evidence of a person’s track record for making payments. Some of the people gaining credit through the new model may face high interest charges, depending on their scores. Still, consumers who qualify for credit cards because of the new scoring model may be able to qualify for a more traditional credit score and gain other loans later on, Wehmann says, since the card would show up on their credit reports.

Other firms and start-ups have introduced similar efforts. VantageScore Solutions, another credit scoring company that was used by more than 2,000 lenders last year, estimates that its VantageScore 3.0 model, which ignores paid medical collections, would give a score to up to 35 million consumers that are not scored under the traditional models.

Happy Mango, a start-up based in New York working on a pilot lending program with a community bank, creates a score for consumers based on their saving and spending habits, as well as input from friends and family.

Read More:

What’s your credit score? Depends on what you’re buying.

Why putting off retirement savings until you make more money is a big mistake

A major overhaul in credit reporting could improve your credit score