Securing credit is about to get easier for millions of inexperienced Americans.
In an April 28 press release, FICO® announced their partnership with LexisNexis Risk Solutions and Equifax to provide FICO Score XD, the latest model aimed at helping previously unscorable consumers gain access to credit using alternative data.
What is “alternative” credit data?
There’s nothing mysterious about alternative credit data. In fact, the term encompasses the most ordinary accounts in your life, from home utilities to cell phone service, rental history and cable service. Although these accounts are commonplace, they are rarely reported to the Big Three credit bureaus by accounts holders, preventing consumers from cashing in on positive payment habits and long-term histories.
Why is alternative data necessary?
FICO XD promises inclusion for consumers who haven’t yet formed a positive credit history due to lack of experience.
“Financial inclusion for more people is what the market is seeking,” Jim Wehmann, Executive Vice- President, Scores, at FICO said in the press release. “We want to create as much financial opportunity for as many people as possible. Obtaining a credit card is often the first step in building a solid credit history. FICO Score XD can help millions of Americans take this step, enabling them to gain access to mainstream financial products and enjoy opportunities that had previously been out of reach.”
Opening the marketplace with underreported data allows businesses to benefits from new customers and allows consumers to build positive credit along the way.
“Data outside of traditional credit reporting opens up opportunities for lenders to pinpoint and target new creditworthy prospects out of a vast, somewhat untapped, market and confidently extend credit to these new consumers,” John Cullerton, senior vice president, New Product Innovation & Product Management at Equifax said in the press release. Additionally, using NCTUE® data in alternative data scores such as FICO® Score XD helps provide consumers with greater access to credit.”
Where is FICO XD used?
FICO XD scores will appear alongside regular FICO scores, allowing lenders to see a fuller picture of credit applicant habits and account history. While they are graded on the same scale of 300 to 850 points, one score will not replace the other.
Does this mean I shouldn’t focus on my regular FICO credit score?
No! FICO is meant to include consumers with little credit experience in the borrowing process, but that doesn’t mean you should ignore your standard FICO score. The basis of XD is inclusion based on alternative data with the goal being long-term credit health and histories. Apply the positive habits used to pay utility bills and cell service to your new credit accounts.
The Bottom Line
The credit system is doing its part to help consumers take control of their finances, and it’s your job to grab the opportunities when they arise. Focus on the Five Factors that apply to every credit score and build your reports with consideration.