As we all know, our FICO score plays a huge part in determining whether we’ll deemed creditworthy, but something new is up in the credit industry. The recession caused the credit scores of many consumers to take a serious dive, and as a result, the number of customers who were eligible for credit cards grew smaller. Naturally, credit card companies want to broaden it. Their goal is to issue more cards and make money again, and they say that factoring in non-traditional data will allow them to do this.
What kind of data are we talking about? A traditional credit score takes five major things into consideration: debt payment history, how much outstanding debt you have, how many credit accounts you have, what kind they are and how long you’ve had them. Non-traditional credit reporting factors in things like your use of prepaid cards, your home’s value, detailed payment information, education, how frequently you move and even your criminal record.
In the past, non-traditional credit factors were generally used to help people with little or no history get credit cards. But credit card companies say that using alternative data is a good way to provide credit to consumers who were financially responsible before the recession.
“Fifteen million consumers had their credit scores (negatively) affected as a result of the recession,” explained Ankush Tewari, director of strategy and market planning at LexisNexis RiskReview, a company that provides non-traditional credit scores. It’s been five years now … many of them have recovered and moved past those credit difficulties, but their traditional credit score doesn’t indicate that.”
There are, of course, problems with this idea. Experts say that alternative data is often inconsistent and potentially inaccurate, which could actually bring scores down for some. Many consumer advocates also feel that the more detailed information factored into alternative credit scores could cause additional harm to certain people. For instance, the scores of low-income consumers might suffer if they’ve missed payments on their gas and electric bills. Or say a person took out a payday loan in a moment of desperation during the recession. Lenders would now have access to that too, and that certainly wouldn’t help.
While we’re big fans of giving responsible consumers a second chance, any time a large financial institution tries to lend a hand, we’ve gotta be suspicious. Credit free-for-alls have not worked out so well in the past. Is this new kind of credit score really just a thinly veiled attempt at sneaking back into deceptive pre-recession loan practices? Who really stands to gain here? Consumers who’ll just be tempted to spend beyond their means again, or credit card companies who will profit if you miss your payments? Something seems fishy to us.
While it doesn’t seem likely that non-traditional data will become credit score norm just yet, the idea is certainly gaining momentum. What do you think about the issue – is it helpful or harmful? Let us know in the comments.