In the past, the only way to create a credit score for yourself was to borrow money. This makes borrowing a little tricky for those who have little or no credit history. How can banks or credit card companies comfortably lend people money if they have no history for determining if they are a good risk?
Payment history – how you have paid your bills in the past — is one of the most important factors in a credit score. Lenders check an individual’s credit score when deciding whether to lend money to him or her.
FICO, the developer of the most widely used credit score, will begin piloting a new score next year (2019) called the UltraFICO score. This new scoring model considers how you manage your checking, savings and money market accounts in addition to how you pay back your credit cards and loans; it could be good news for those who have a strong banking record but have little or no credit history or have negative information on their credit reports. If you manage your checking, savings and/or money market accounts wisely, avoiding overdrafts and usually keep a modest “cushion” of at least $400 in your checking account, your credit score could receive a much needed boost that can make a difference when applying for a loan.
Use of the UltraFICO score is not automatic. Consumers must opt in before lenders can access their banking records and calculate the alternate score. Consumers who already qualify for credit on good terms will never need to authorize the UltraFICO score; those whose “regular” FICO scores aren’t quite good enough to qualify are the ones who may benefit from use of the UltraFICO.
FICO has announced the new scoring model as a “pilot” and has not specified how widely it will be in use, so there is no guarantee it will be available through your lenders. Nevertheless, it is worthwhile to be aware of the possibility, for two reasons:
- If you are turned down for a loan or credit account, you may wish to ask the lender if they can check an alternate scoring model such as the UltraFICO score.
- It is a reminder that responsible management of your banking accounts can pay off; if you have a tendency to occasionally get sloppy and incur an overdraft, the existence of UltraFICO may motivate you to manage your accounts more carefully.
As always, the best way to improve or protect your credit score is to consistently pay your bills on time, reduce the amount of debt you owe as much as possible and apply for credit only when needed.