New credit scores target 'underserved' consumers
By Pat Curry • Bankrate.com

Consumers who have been turned down for credit or paid a higher interest rate because a scant credit history gave them a low credit score have another shot now at more-favorable terms.

Fair Isaac Corp., creator and owner of the FICO score that is widely used in the mortgage, auto loan and credit card industry, has created a new score designed to predict credit risk for individuals with little or no credit history. The new FICO expansion score draws on information in an array of small credit reporting agencies outside the realm of the three major credit bureaus, says Craig Dillon, vice president of scoring solutions at Fair Isaac. The new score draws on data from industries such as pay day loan companies, rent-to-own stores and banking organizations that share information about people who abuse overdraft protection on checking accounts.

The company's market research, which is confirmed by others in the credit industry, indicates that while about 160 million consumers have enough information on file to generate a valid FICO score, as many as another 50 million do not. The consumers who might get a break with the new score include recent immigrants to the United States (whose good payment histories from their home countries don't transfer to the U.S. credit reporting system), college students, new divorcees and widows, those with low incomes, and people whose cultures don't trust financial institutions or large national organizations, Dillon says.

A FICO score is a three-digit number used to predict how risky it is to extend credit to an individual. A statistical algorithm that compares a person's credit history to those of millions of other consumers, it uses a scale from 300 to 850. Most people will have scores between 600 and 800 -- if there's enough information in the credit bureau records to generate a score. That information comes from such places as mortgage companies, credit card issuers and auto financing companies.

Without sufficient information at a credit bureau to generate a FICO score, or so little information that it produces a very low score, many consumers either are turned down for credit or pay more for it. They might have never paid their rent or their utilities late, but those companies generally don't report payment data to the credit bureaus.

Many times, the need to gather a year's worth of rent receipts or utility payments discourages borrowers from even trying to get a mortgage, says Randall Johnson, CEO of Florida-based Market Street Mortgage Corp. "To have (Fair Isaac) convert that information to a credit score is a real help to the industry. If it operates the way it should, it should be a real win-win."

The new score won't help individuals who have a low FICO score because they've messed up their credit by paying their bills late or walking away from them.