SoFi challenges FICO scores

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Many lending upstarts are moving away from the FICO score in credit decisions, using new scoring models aimed at expanding credit for personal loans.

Social Finance Inc. (SoFi), a San Francisco company, is one of the biggest to do so.

The company, which offers student loan refinancing, mortgages and personal loans — recently announced that it would no longer use FICO scores in its lending decisions.

“We just don’t think the score itself is a real driver to credit performance,” Mike Cagney, chief executive of SoFi, told The Wall Street Journal.

The bet that companies like SoFi are making is that their alternative scoring models will hold up better in a tougher business environment.

Other notable loan companies on the no-FICO bandwagon include Affirm Inc., Avant Inc. and Earnest Inc.

The FICO Free Zone at SoFi

SoFi calls it the FICO Free Zone. “At SoFi, the FICO Free Zone means that we’re taking a more holistic view of our applicants’ financial well-being — and where they’re headed,” SoFi says on its site.

SoFi claims that FICO scores are flawed and outdated, that they don’t tell the whole story and can even be misleading under certain circumstances. FICO scores are more indicative of past behavior than future behavior, according to SoFi.

SoFi’s criteria

The scoring model that SoFi uses takes into consideration things like your savings, your cash flow, your ability to pay non-credit bills and your future earnings.

The criteria for a loan is based on three factors: your history of responsible bill payment, monthly income vs. expenses, and professional experience.

So even if you have a high FICO score, you may still get denied for a SoFi loan.

“There are lots of situations where we see very high FICO scores but [the borrowers] don’t have the cash flow, and we can’t underwrite them,” Cagney told the WSJ.

The FICO staple

FICO scores are still the dominate score used in 90% of all credit decisions, according to research from CEB TowerGroup. And it’s been that way for more than 2 decades.

Indeed, perhaps the biggest advantage that FICO scores have over alternative methods is historical performance data. SoFi has only been lending since 2011.

But a large swath of the U.S. population lacks a FICO score. About 8.3%, or 19 million, Americans were considered “unscorable” as of 2010, due to insufficient or lack of credit history, according to a 2015 report from the Consumer Financial Protection Bureau.

New, alternative, credit scoring models, like SoFi’s, may open up doors for prospective creditworthy borrowers who haven’t been able to get loans in the past.

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Follow me on Twitter: @MitchStrohm