Changing The Credit Score
Like all Americans, I was obliged to enter the world of FICO credit scores by birth and the illustrious achievement of becoming 18. It wasn’t until after I became a hiring manager — reviewing hundreds of employment records — that I realized how outdated, unregulated and disorderly employment and income verification systems are.
Today, our lives are bursting with real-time data solutions, yet the FICO score model remains highly antiquated, pulling data monthly and doing so without user consent or verification. The company I founded in 2018 aims to dismantle this obsolete approach to creditworthiness.
First developed in the late 1980s by the company founded by engineer Bill Fair and mathematician Earl Isaac, the FICO score is a relatively recent rubric, but you wouldn’t know it from the way it permeates our financial ecosystem. Fair, Isaac, and Company (FICO) established a way to regulate creditworthiness. The company wanted to create something better than the thousands of individualist practices of credit lenders and credit rating systems that existed at the time. It wanted to standardize a more accurate way of determining one’s likelihood of paying back debt — something more tangible than relying on a loan officer’s opinion of you, which lacks the depth of quantitative analysis.
FICO also knew that credit evaluators didn’t have time to search through hundreds of records to make a determination, meaning your “worthiness” was difficult to ascertain. This limited view placed a lot of risk on creditors since they didn’t have absolute proof of debt and payment history, making payback more of an honor agreement than a calculation.
One Number To Rule Them All
In 1989, the proprietary FICO score was born. Equifax, Experian and TransUnion began using the number, and a new standard financial identity emerged out of the hundreds in existence.
What makes up the FICO score?
Today’s credit formula acts as a data arbiter, categorizing you as bad, poor, fair, good and excellent. We have no say in its makeup, and its lack of modernity neglects innovative approaches that are more capable of appraising one’s real-time financial acuity.
We know very little about the score’s makeup or why it’s based out of 850 like some kind of financial SAT. We do know, according to FICO:
• 35% is payment history.
• 30% is debt burden.
• 15% is credit history length.
• 10% is the type of credit you have.
• 10% is recent searches on your credit.
An Era Of Standardization
Technology is rapidly altering the way we do business and interact, yet it’s not democratizing our monopolistic institutions in parity with innovation. The upside of the FICO score is that standardization makes things more equitable. No longer does getting a loan or credit card from a department store mean the application processor has to like you. Everything is now based on data.
However, the question we need to ask ourselves is: What data? Not only the data that’s most important and informative for evaluating a borrower, but the undisclosed data being used that we’re unaware of and, therefore, can’t attempt to change or influence.
Our technologically sophisticated culture demands transparency and oversight by users.
Building A New Credit Scoring Model
Credit scoring has a very limited view of people’s overall financial health, purchasing power and payment histories. Because a FICO score doesn’t take into account things like assets, rent or utilities, it only offers a sliver of information that’s likely relevant to one’s habits. If you always pay your rent on time (and rent can account for upwards of 50% of income in certain places), wouldn’t it stand to reason you’d also pay your mortgage on time while having the additional benefit of building equity and having a valuable asset?
Five Ways Fintech Can Immediately Improve Credit Scoring
1. Several companies, like Experian Boost, already exist that connect directly to a consumer’s bank account and report recurring, on-time payments to the credit bureaus — things like rent, utilities and cellphones. Consumers are spending and paying on time in many areas of their life, and this should count toward their creditworthiness.
2. The way people earn income has changed drastically over the last 10 years (let alone since the FICO model was created). Fintech solutions like Mint can allow consumers to connect their payroll apps, payment programs and other sources of income, providing comprehensive insight into their current financial situation.
3. Payroll data that can be obtained by APIs already on the market can look beyond just income. Length of employment is actually one of the best indicators of a borrower’s creditworthiness.
4. We shouldn’t discount international credit or income, especially relevant for immigrants or those who may not have a decade of credit history in the United States. Companies like Stilt — which is one of our partners — exist to help immigrants get loans.
5. Update information in real time. People’s circumstances change frequently, yet FICO scores update once per month, and records can chain them to financial histories from a decade ago. Fintech can build a better real-time picture to give potential creditors an understanding of what’s happening now and in the last few years. This doesn’t mean credit scores or creditworthiness should change in real time. Instead, we should reevaluate how the scores are calculated. Should a job loss during a recession eight years ago that resulted in bankruptcy really weigh as heavily if we have real-time data that the borrower has had steady employment and income for the last five years?
The FICO score ushered in an era of standardization like no other time in credit reporting history, and that was a radical advancement. Today’s fintech offers all five of the above-mentioned improvements. However, the platforms are piecemeal, and the FICO score isn’t integrating them in the ways consumers need. What was once a standardization revolution for credit scoring has yet again become a dismembered data field. Like all revolutions, the next one is around the corner, and fintech is ready to make the current iteration of the credit score obsolete.