Around October of last year, it was announced that FICO would be adding a new opt-in program, UltraFICO, that would help millions of consumers build their credit scores. This new program would allow you to link your bank accounts to show good financial habits that are currently overlooked in traditional credit score reporting. I was immediately intrigued by this idea, but I wanted to learn more.
As I did some research on UltraFico, I came across an article that called UltraFICO “ultra ridiculous”… this was a Dave Ramsey article, and if you know his views on credit scores and credit cards, then you might understand where his feelings come from. Hint: he doesn’t like them.
I get Ramsey’s train of thought. When used irresponsibly, credit cards are awful. If you aren’t paying them off like you should, you can fall into a never ending cycle of debt. And, we all saw what happened back in 2008 when banks were loaning money to subprime borrowers… one of Ramsey’s concerns with UltraFICO. This had devastating effects on the financial markets and to those consumers who were lured into risky loans.
Rather than giving you my opinion or digging anymore into what DR has to say, I want to tell you what UltraFICO is and who it’s supposed to help.
What is UltraFICO?
You’ve heard of FICO, right? If not, FICO (Fair Isaac Company) is the largest and most well-known credit scoring company and was founded by Bill Fair and Earl Isaac in 1956. FICO is what informs credit bureaus of your creditworthiness – i.e. how reliable you will be to a lender in paying off a debt or loan. Not only does your credit score affect your ability to qualify for loans and get the lowest possible rates but it might also be used when applying for a rental, finding the best insurance rates, and looking for jobs.
I’d say that a good credit score is a pretty important part of being an adult. And whether I agree with it or not, I need a decent credit score to do many things in life. When you are good with credit, your credit score can do something pretty cool – save you money.
Back to UltraFICO…
… UltraFICO is a new, still unreleased, opt-in program being launched by FICO that will take additional markers and use them to potentially boost your credit score. Those markers are:
- How long your checking and savings accounts have been open.
- How often you use and actively manage good-standing accounts.
- What kind of history you have with overdrawing funds, bouncing checks, etc.
- Your savings behavior or ability to maintain an account balance over a certain level.
If you choose to opt-in to UltraFICO, FICO will use the information that they gain from your bank accounts to build a new credit score for you, one that looks at more than just your actual credit history. Remember, this is a voluntary opt-in.
What makes your credit score?
To understand how UltraFICO is different, I want to cover what your credit score currently takes into consideration:
- Your payment history
- Your utilization rate
- Credit history or length of credit
- Types of credit
- Number of credit inquiries
When you look at these factors, there is one big thing you may notice – they are based on having credit, meaning you go in with zero credit and build it up from there. While you can get around in life with a low credit score, it can be difficult.
Who is UltraFICO designed to help?
To put it simply, UltraFICO was designed to help people with “thin” credit files or those who are rebuilding their credit – aka subprime borrowers.
- For younger borrowers or those with zero to little credit history, UltraFICO will take your responsible banking habits and use them to boost or help build a score.
- For people who are trying to rebuild their credit, as long your bank accounts currently look good, UltraFICO might be a way to boost a score that has been damaged.
Regarding damaged credit scores, I have personal experience with this when I was paying off my student loans, and it’s possible UltraFICO would have helped me. To read how quickly I dropped from an 800 to a 564 and the length of time it took to bring my score back up to 700, check out How to Rebuild Your Credit Score Quickly.
Those who are new to credit scores will likely benefit the most by the UltraFICO score, because like you’ll see in that article I just linked to, rebuilding your score is hard work. Also, since FICO isn’t releasing the exact details on its algorithm, we really have no idea how it weighs your bank account information with the rest of the credit reporting factors.
It does sound like you can expect UltraFICO to add around 20 points to your credit score. While that doesn’t sound like a lot, it will probably help those in the 500-600 range the most.
Let’s go back for a second. What does your bank account have to do with a credit score?
This is a really good point to discuss. Let’s think about how a good credit score might not always be a marker of a healthy financial well-being:
- You might be making only the minimum payments on your accounts. Since on-time payments make up a good portion of your credit score, you’re earning points for that. At the same time, you’re extending the life of your debt and the amount that you’ll pay in the long term.
- Your utilization rate is low because you keep opening new credit card accounts. Utilization rate makes up around 30% of your credit score, so having a bunch of cards open will raise your score. Some people do this intentionally (travel hacking for example), but it can backfire by tempting your spending or making it difficult to be as aggressive with the debt that you already have.
- Your high score might qualify you for a high loan amount and you take the max. Maxing out your budget can prevent you from paying off any other debt and saving like you should, and what you’re approved to borrow isn’t always what you should borrow.
In each of these scenarios, having a high credit score doesn’t mean you’re being very good with your money. Being able to keep money in your bank, maintaining a healthy balance, and not overdrawing might be more appropriate markers of your financial fitness in those situations.
Those healthy banking habits might mean you can get by without a credit card or loan, and that might make you a better candidate than someone who is just making the minimum monthly payments on their debts. Money in the bank is what you own, whereas debt is what you owe.
Can UltraFICO hurt your credit score?
Yes, there definitely will be people whose credit scores would be hurt if they opt into the UltraFICO score. Remember, you need to already have good banking habits to see this boost in your score. If you aren’t keeping money in the bank, are overdrafting, etc., then opting into UltraFICO will show lenders that you aren’t trustworthy.
Like I said, FICO hasn’t released much information about their algorithm, so it’s hard to know what the threshold is on good banking habits.
A few more things to know about UltraFICO
- UltraFICO is supposed to roll out later this year, possibly the summer.
- It will take time for it to be used on a larger scale. This means it will likely take years for all lenders to get on board with UltraFICO.
- Experian will start as the only credit reporting agency to use UltraFICO. If your lender doesn’t use Experian, UltraFICO won’t help you.
- UltraFICO probably won’t help those with good credit (see my last point about banking habits vs. credit habits).
- Since UltraFICO pulls bank account information, it could potentially open you up to more security concerns.
Besides UltraFICO, what are other ways to build your credit score?
While you wait for UltraFICO to be rolled out and decide whether you’re interested in opting in, there are still other ways to boost your credit score:
- Always pay your bills on time and get current with any outstanding, late, or delinquent payments.
- Keep your balances low.
- Pay off your debt rather than moving it around.
- Don’t close credit cards as a strategy to raise your score. This action will likely have the opposite effect.
- Don’t open cards that you don’t need in order to boost your score.
- Remember that applying for new credit cards or loans is a hard pull, which will ding your score for a short period of time.
- Checking your credit report does not hurt your credit score, and you should be regularly checking this.
M$M tip: Read How Long Does it Actually Take to Improve Your Credit Score? for tips on improving your score and learning more about what goes into your credit score.