FICO 10 and FICO 10 T are new credit scoring models developed by FICO that have the potential to change the credit industry in a major way.
Credit expert John Ulzheimer, who worked for FICO for seven years and has almost 30 total years of experience in the industry, explained what FICO 10 and FICO 10 T are and what they mean for you as a consumer in an episode of Credit Countdown.
Disclaimer: The views and opinions expressed in this article are strictly those of John Ulzheimer and do not necessarily reflect the official stance or position of Tradeline Supply Company, LLC. Tradeline Supply Company, LLC does not sell tradelines to increase credit scores and does not guarantee any score improvements. Tradelines can in some cases cause credit scores to go down.
What Are FICO 10 and FICO 10 T?
The FICO 10 and FICO 10 T credit scoring models are part of the latest generation of credit scores in FICO’s lineup, which also includes FICO score generations 2, 3, 4, 5, 8, and 9. Currently, the most widely used base model is FICO 8. With every new FICO score, FICO tries to improve upon the power of their scores to predict consumer defaults, which is the overarching goal of credit scores generally.
The tenth generation of FICO credit scores is technically called the FICO 10 Suite, as it contains multiple different versions of FICO 10, although in common language this entire group is often simplified as just “FICO 10.”
FICO 10 was announced in early 2020, and it has received much media attention due to the changes that distinguish it from its earlier counterparts.
Why Are Consumers Worried About FICO 10?
Media coverage of the new suite of credit scores tends to focus on the claim that some consumers may see their credit scores go down with FICO 10.
However, John Ulzheimer says that this creates “controversy where controversy doesn’t exist.”
Why? Here are two reasons.
1. The FICO 10 Suite is a normal redevelopment of the FICO credit scoring system.
As we discussed above, FICO regularly redevelops their credit scoring models in order to make them more and more predictive of credit risk.
This is just like what other companies do with their products. Think of Apple and the iPhone: there isn’t just one iPhone anymore. They introduce newer generations of the iPhone, and people want to upgrade to the new and improved models that work better.
This does not mean that the previous versions were “bad,” just that there is a new version that may be better.
2. Your credit scores will be different every time FICO redevelops its credit scoring system.
With every change that is made to the credit scoring system, as an inevitable consequence, your credit score will change. That’s not necessarily a bad thing. Your credit score could go up, or it could go down, or it could remain similar to where it was.
Regardless of any changes made, the fact is that if you have a good credit score with one scoring model, you will likely still have a good credit score with a different model. The same goes for bad credit scores. Although different credit score versions have different ways of going about it, they all share the ultimate goal of predicting a consumer’s credit risk, and this will be reflected in your scores regardless of which particular credit scoring model is used.
There are dozens of different credit scoring models, and your credit score is going to be different with each model.
How Will FICO 10 Affect Your Credit Score?
In terms of how FICO 10 could affect your score, John says that newer credit scoring models such as FICO 10 do a better job of separating high-risk and low-risk consumers than older models. In other words, if you have good credit, your score is likely going to be higher with FICO 10. If you have bad credit, your credit score is likely going to be lower with FICO 10.
According to John, this is normal and it is what you would expect to see with any new credit scoring system.
What About FICO 10 T (FICO 10 Trended)?
The “T” in FICO 10 T stands for trended data.
FICO 10 T is unique among FICO’s roster of credit scores because it is the only tri-bureau FICO score on the market with trended data. (FICO competitor VantageScore also has a credit score that uses trended data, VantageScore 4.0.)
What Is Trended Data and Why Is It Unique?
When you check your credit report, you may see that some of your accounts show a history of your balances, your payments due, and how much your payments actually were each month for the past 24 months.
Being able to see this information over time makes it easy to understand the trends in your usage of the account.
Here are some examples of the types of insights trended data can provide:
If you are running up large balances over time. If you are keeping your balances relatively low over time. If you have been making your minimum payments over time. If you have been paying in full over time. What percentage of your balance you have been paying over time.
Trended data allows credit scores to consider trends in how you have managed your accounts over the past 24 months.
FICO 10 T can now consider this data as part of calculating your credit score.
The information trended data provides is very valuable because it adds another level of data that helps to predict the likelihood that a consumer will default.
For example, a consumer who has a perfect payment history and pays in full every month or keeps a relatively low balance is probably going to score better with FICO 10 than a consumer who maxes out their credit cards or keeps a relatively high balance over time, even if they pay off their credit cards every month.
The research done on trended data demonstrates that transactors, those who charge balances and then pay in full, carry less risk than revolvers, who roll over a portion of the balance from month to month rather than paying it off in full each month.
Consumers who carry a balance over time instead of paying their balances off in full every month will be penalized by FICO 10 T.
To summarize, trended data is what makes FICO 10 T different from the base version of FICO 10. FICO 10 still works like other traditional credit scoring models in that it only looks at a “snapshot” of your credit report at a given time.
Should You Be Worried About the FICO 10 Suite of Credit Scores?
You don’t need to stress out about FICO 10, especially if you have good credit, as you will still have a good credit score under FICO 10.
The same practices that are important in other credit scoring systems still apply to FICO 10 and will still reward you with a good score:
Always make your payments on time. Pay off your credit cards in full every month. Keep your balances low relative to your credit limits (maintain a low revolving utilization ratio). Limit the number of hard inquiries that hit your credit report by only applying for credit when you actually need it.
We hope this article helped you understand the new FICO 10 and FICO 10 T credit scores. Check out the video below, and browse our Knowledge Center and subscribe to our YouTube channel for more content like this!
We’ve written before about the problem of credit invisibility, which is when a consumer does not have a credit score. Millions of consumers are credit invisible in the United States, which represents a serious obstacle in the path to financial success in a society where credit is interwoven with so many aspects of our lives. You yourself may even be credit invisible and looking for a way to become credit visible by gaining credit history.
In order to be able to generate a credit score, your credit report has to meet certain requirements. These requirements are slightly different depending on whether the credit scoring model being used is a FICO score or a VantageScore.
FICO Score Minimum Credit Scoring Criteria
You must have at least one undisputed tradeline.
A tradeline is an account on your credit report. This may include credit cards, lines of credit, installment loans, etc. (Other items on your credit report that are not accounts and therefore are not considered tradelines include collections, judgments, tax liens, bankruptcies, and inquiries.)
In order to be included by credit scoring models, the tradeline cannot be disputed.
The undisputed tradeline must be at least six months old.
At least six months of credit history are needed in order to accurately predict your likelihood of defaulting in the future, which is what credit scores are designed to do. Trying to come up with a credit score using fewer data points might cause the score to be less predictive of your actual credit risk, which could create problems for lenders.
You must have recent activity on your credit report (within the past six months).
To meet this requirement, you must have at least one undisputed tradeline that has been updated within the past six months. Don’t worry, this can be the same tradeline that qualifies you for the prior two criteria as long as it has reported activity within the past six months, or it can be a different account.
You cannot be listed as “deceased” on your credit report.
Credit scores cannot be created for individuals who are deceased (or appear to be deceased due to an error).
If your credit profile satisfies these criteria, then you will be able to qualify for any FICO score regardless of which generation it may be.
VantageScore Minimum Credit Scoring Criteria
Compared to FICO scores, the VantageScore credit scoring models have less stringent requirements on who can qualify for a credit score.
You cannot be listed as “deceased” on your credit report.
Like FICO scores, VantageScores also do not calculate credit scores for deceased consumers.
You should have at least one or two months of credit history with any credit bureau.
According to MoneyCrashers.com, “the VantageScore model typically produces scores for consumers with one to two months of credit history, regardless of which bureau reports that activity.” The account or accounts do not need to have six months of age in order to be scored.
The company claims that the VantageScore 4.0 and 3.0 models can provide credit scores to 40 million consumers who cannot be scored using other types of credit scoring models since it is easier for consumers with limited information in their credit files to meet the minimum scoring criteria.
What the Lender Sees When You Do Not Have a Credit Score
If a lender tries to pull your credit score and you do not have one for any of the above reasons, they will instead receive what is known as a “reject code” or a “failure code.”
This reject code indicates to the lender that you have failed to meet the minimum credit scoring criteria and which criteria you did not satisfy.
Watch the video on this topic featuring seasoned credit professional John Ulzheimer below, or go to our YouTube channel to subscribe and see more credit-related videos!
We’ve written before about the problem of credit invisibility, which is when a consumer does not have a credit score. Millions of consumers are credit invisible in the United States, which represents a serious obstacle in the path to financial success in a society where credit is interwoven with so many aspects of our lives. You yourself may even be credit invisible and looking for a way to become credit visible by gaining credit history.
In order to be able to generate a credit score, your credit report has to meet certain requirements. These requirements are slightly different depending on whether the credit scoring model being used is a FICO score or a VantageScore.
FICO Score Minimum Credit Scoring Criteria
You must have at least one undisputed tradeline.
A tradeline is an account on your credit report. This may include credit cards, lines of credit, installment loans, etc. (Other items on your credit report that are not accounts and therefore are not considered tradelines include collections, judgments, tax liens, bankruptcies, and inquiries.)
In order to be included by credit scoring models, the tradeline cannot be disputed.
The undisputed tradeline must be at least six months old.
At least six months of credit history are needed in order to accurately predict your likelihood of defaulting in the future, which is what credit scores are designed to do. Trying to come up with a credit score using fewer data points might cause the score to be less predictive of your actual credit risk, which could create problems for lenders.
You must have recent activity on your credit report (within the past six months).
To meet this requirement, you must have at least one undisputed tradeline that has been updated within the past six months. Don’t worry, this can be the same tradeline that qualifies you for the prior two criteria as long as it has reported activity within the past six months, or it can be a different account.
You cannot be listed as “deceased” on your credit report.
Credit scores cannot be created for individuals who are deceased (or appear to be deceased due to an error).
If your credit profile satisfies these criteria, then you will be able to qualify for any FICO score regardless of which generation it may be.
VantageScore Minimum Credit Scoring Criteria
Compared to FICO scores, the VantageScore credit scoring models have less stringent requirements on who can qualify for a credit score.
You cannot be listed as “deceased” on your credit report.
Like FICO scores, VantageScores also do not calculate credit scores for deceased consumers.
You should have at least one or two months of credit history with any credit bureau.
According to MoneyCrashers.com, “the VantageScore model typically produces scores for consumers with one to two months of credit history, regardless of which bureau reports that activity.” The account or accounts do not need to have six months of age in order to be scored.
The company claims that the VantageScore 4.0 and 3.0 models can provide credit scores to 40 million consumers who cannot be scored using other types of credit scoring models since it is easier for consumers with limited information in their credit files to meet the minimum scoring criteria.
What the Lender Sees When You Do Not Have a Credit Score
If a lender tries to pull your credit score and you do not have one for any of the above reasons, they will instead receive what is known as a “reject code” or a “failure code.”
This reject code indicates to the lender that you have failed to meet the minimum credit scoring criteria and which criteria you did not satisfy.
Watch the video on this topic featuring seasoned credit professional John Ulzheimer below, or go to our YouTube channel to subscribe and see more credit-related videos!
One question we often hear in the tradeline industry is “Do tradelines still work in 2021?”
Fortunately, we can say with certainty that tradelines do still work in 2021, and we are confident they will continue to be effective for years to come.
To explain our answer, we will delve into the history of authorized user tradelines and the policies that regulate the tradeline industry.
Why Do Tradelines Work?
Although the term “tradeline” could refer to any account in your credit file, usually in our industry people use the word as shorthand for authorized user tradelines, or accounts on which you are an authorized user.
Credit card companies allow cardholders to add authorized users (AUs) to their accounts, which are people who are authorized to use the account but are not liable for any charges incurred. For example, a business owner could add an employee as an AU of their credit card, or a parent could add their child.
When someone is added as an AU, often the full history of the account is shown in the credit reports of both the primary user and the AU, regardless of when the AU was added to the account. Therefore, the AU may have years of credit history associated with the account reflected in their file as soon as they are added.
This is why obtaining an AU tradeline through a family member or friend is a common way for people to start establishing a credit history. In fact, studies estimate that 20%-30% of Americans have at least one AU account.
Why are authorized users able to share the benefits of the primary user’s credit rating, even though they are not liable for the debt? This policy is a result of the Equal Credit Opportunity Act of 1974 (ECOA).
Before ECOA was passed, creditors would often report accounts shared by married couples as being only in the husband’s name. This prevented women from building up a credit history and credit score rating in their own names, which in turn prevented them from being able to obtain credit independent of their husbands.
In response to this unequal treatment, ECOA was passed to prohibit discrimination in lending. The federal law made it illegal for creditors to discriminate on the basis of sex, marital status, race, color, religion, national origin, age, or receipt of public assistance.
This means that creditors may not consider this information when deciding whether or not to grant credit to an applicant or determining the terms of the credit.
ECOA was passed in large part to prevent creditors from discriminating against women and to provide equal credit opportunities to women.
Regulation B is a section of ECOA that specifically requires that creditors report spousal AU accounts to the credit bureaus and consider them when lenders evaluate a consumer’s credit history.
Generally, creditors do not distinguish between AUs that are spouses and those that are not when reporting to the credit bureaus, which effectively requires the credit bureaus to treat all AU accounts in the same way.
As a result of this policy, the practice of “piggybacking credit” emerged as a common and acceptable way for individuals with good credit to help their spouses, children, and loved ones build credit or improve their credit.
The practice of piggybacking is the foundation of the tradeline industry. In a piggybacking arrangement, a consumer pays a fee to “rent” an authorized user position on someone else’s tradeline. The age and payment history of that tradeline then show up on the consumer’s credit report as an authorized user account.
Are Tradelines Legal?
It is understandable that there is some confusion about this since not many people are aware of the idea of tradelines for sale, although the practice has been in use for decades.
While Tradeline Supply Company, LLC cannot provide legal advice, we can refer to several official sources, including the Federal Trade Commission, who have indicated that it is legal to buy and sell tradelines.
While tradelines are not illegal, historically, they have not been accessible to everyone. The high cost of tradelines meant that only the wealthy could afford to purchase tradelines for credit piggybacking. Today, however, innovations in the industry have lowered the cost of tradelines, making them affordable to a much wider audience.
Tradeline Supply Company, LLC is proud to be leading the tradeline industry in automating the process of buying and selling tradelines, offering some of the lowest tradeline prices in the industry, educating consumers on the credit system, and making tradelines accessible to everyone.
Our goal is to provide equal opportunities to those who do not have access to authorized user tradelines through friends and family by providing an online platform that allows for a greater network of connections.
But Didn’t Credit Card Piggybacking Get Banned?
Fair Isaac Corporation (FICO), the creator of the widely used FICO credit score, did try to change its scoring model to eliminate the benefits of authorized user tradelines, although they were ultimately unsuccessful. The firm announced that they were planning to devise a way to allow “real” AUs to keep the benefits of their AU tradelines while at the same time discounting the value of AU tradelines for consumers who FICO deemed to be “gaming the system.”
FICO admitted to Congress that they could not legally discriminate between AUs based on marital status due to ECOA.
While this statement understandably caused a lot of concern among consumers of tradelines, as it turns out, FICO was never able to implement this change in their scoring system.
At a congressional hearing in 2008, Fair Isaac’s president admitted that they could not legally distinguish between spousal AUs and other users, because discriminating based on marital status would unlawfully violate ECOA.
After consulting with Congress and multiple federal agencies, FICO was blocked from discriminating against AU account holders. Consequently, all AU accounts are still being considered in FICO 8, the most widely used credit scoring model.
In addition, studies have shown that accounting for AU data helps make credit scoring models more accurate, so it is actually in FICO’s best interest to continue including all AU accounts in their credit scoring models.
In working with thousands of consumers over the years, our results prove that in 2021, AU tradelines still remain an effective way to add information to an individual’s credit report, regardless of the relationship between the primary user and the authorized user.
Here’s another piece of evidence that proves that authorized user tradelines still work in 2021: many banks actually promote the practice of becoming an authorized user for the specific purpose of boosting one’s credit score. To see this for yourself, all you need to do is go to any major bank’s website and search for “authorized user.” You are almost guaranteed to see several articles pop up that talk about becoming an authorized user in order to build a credit history.
How Do We Know Tradelines Will Continue to Work in the Future?
Most widely used credit scoring models still include authorized user “piggybacking” accounts.
Given that FICO has already targeted the tradeline industry before, it makes sense to wonder whether tradelines will still work in the years to come if FICO eventually does succeed in coming up with a way to discriminate against certain AUs.
Thankfully, we can rest assured in knowing that the tradeline business will be around for a long time. The reason that we can be sure of this is that the credit industry is extremely slow to adapt, so even if FICO were to roll out a new credit score model that can tell which AUs purchased their tradelines, it would take years, if not decades, for this new credit score to be adopted across the entire financial industry. Let us explain why this is the case.
Credit scoring is a complicated process, and all lenders have their own guidelines when it comes to underwriting. FICO has many different scoring models, and the specific versions used to evaluate credit applicants vary widely between different industries and even between individual lenders within the same industry.
Currently, the three major credit bureaus (Equifax, Experian, and TransUnion) use the version called FICO 8, which debuted in 2008. Consequently, this is also the version that most lenders use for measuring consumer risk for various types of credit, such as personal loans, student loans, and retail credit cards.
However, according to FICO, the mortgage industry still relies on the much older FICO score models 2, 4, and 5. Auto lenders sometimes use FICO 8, while many still use FICO 2, 4, and 5. Credit card companies may use versions 2, 3, 4, 5, and 8.
As if this isn’t complicated enough, many lenders also use proprietary credit-scoring guidelines specific to their businesses. As FICO’s website says, “It is up to each lender to determine which credit score they will use and what other financial information they will consider in their credit review process.”
As you can see from the wide range of versions used, lenders are extremely slow to adapt to changes in FICO’s credit scoring model. In addition, their underwriting processes have been built around previous versions of FICO. All of the credit score data they have accumulated over time is only accurate for the particular version that was used to calculate it.
Transitioning to a completely new credit score model would require businesses to expend significant resources on updating their technological systems, collecting and analyzing new consumer data, training employees, and possibly incurring financial losses as a consequence of not being able to rely on the consumer data they collected while using older credit score models.
For these reasons, most lenders tend to be very reluctant to introduce the latest FICO credit scoring model.
Lenders use credit scoring models that are specific to their industries, so they tend to resist changing to newer models. Photo by InvestmentZen.
So, even if FICO were to successfully eliminate authorized user data in future credit scoring models, it is likely that it would take years or even decades for lenders to adapt to this change.
In addition, as the 2008 congressional hearing showed, FICO will face pushback from the federal government if they try to eliminate authorized user benefits again. It is highly unlikely that a large company like FICO would want to risk being shut down by the federal government for violating the law.
Consumers wouldn’t stand for it, either. In the Washington Post, J.W. Elphinstone wrote, “Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed… there’s no way to distinguish these from the latest crop of strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.”
Final Thoughts
When FICO took the issue of piggybacking all the way up to Congress in 2008, they made headlines in their fight against the practice.
This was also during the same time that the subprime mortgage meltdown began which preceded the Great Recession. The entire mortgage industry had to be overhauled and many people assumed that the tradeline industry went down along with it.
What did not make headlines is that FICO’s push to do away with the authorized user tradeline industry actually failed due to the government upholding ECOA and the FTC affirming that the practice of buying and selling tradelines is allowed.
The banks themselves even promote credit card piggybacking among friends, family, and co-workers.
26 million consumers in America have no credit record whatsoever. On top of that, there are an additional 19 million consumers who do have credit files, but they do not contain sufficient credit information to be scored by a widely available credit scoring model. These consumers—in total making up nearly one in five American adults—are the “credit invisibles” and “credit unscorables.”
Due to a lack of credit history, these consumers are virtually invisible to the credit system. That means credit can be very hard or even impossible to obtain when it is needed. After all, we all know that “it takes credit to get credit,” since lenders often don’t want to take the chance of lending to someone with no prior credit record.
“Alternative data,” which involves using data sources other than traditional credit reporting information to make lending decisions, is a concept that is becoming increasingly popular as one possible solution to the problem of credit invisibility.
Let’s shed some light on the emerging topic of alternative credit data and how it could help or hurt consumers.
What Is Alternative Credit Data and How Does It Differ From Traditional Credit Data?
Traditional credit data refers to your credit report, credit scores, and the information they contain. In other words, traditional credit data primarily consists of information about how you manage your tradelines, which are the credit accounts you own.
When we are talking about credit, we are almost always discussing traditional credit data since that is what is used to make most lending decisions.
In contrast, alternative credit data is financial information about consumers that is not typically included in traditional credit reports. Examples of alternative credit data sources include rent payments, utility payments, full-file public records, and data from alternative financial service providers (ASFPs), such as payday lenders.
Traditional Credit Data Alternative Credit Data
Contains information about the tradelines in your credit report Information comes from other sources since there is insufficient credit data
Payment history for loans and credit cards Data from alternative financial service providers (e.g. payday lenders)
Credit utilization ratio Utility payment history
Delinquencies Rent payment history
Credit mix Consumer-permissioned data
Credit inquiries Full-file public records information
What Is the Purpose of Alternative Credit Data?
Alternative data includes data that consumers may choose to allow credit reporting companies to access, such as bank account balances.
For the millions of consumers who lack credit reports based on traditional credit data, building credit and obtaining credit is a challenge. Without a verified credit history, lenders cannot make an informed decision about whether to extend credit to a consumer.
One way the credit scoring industry is trying to address this problem is by creating new types of credit scoring algorithms that utilize different sources of data that are not contained within a consumer’s traditional credit report but still have predictive power with regard to a consumer’s credit risk.
These alternative data sources, such as rent and utility bill payments, are more accessible and more commonly used among those who are credit invisible.
The idea behind alternative credit data is that a consumer’s non-credit financial information can still be used to predict whether the consumer is financially responsible and creditworthy. This information can help lenders provide credit to consumers who may have a thin credit file or no credit file at all but who may still be creditworthy.
Therefore, using alternative data to make lending decisions could theoretically allow lenders to expand their customer base and earn more revenue while providing more credit to consumers who lack a traditional credit history.
How Do Consumers Benefit From Alternative Data?
The benefit to consumers, of course, is that many consumers who may be creditworthy but are invisible to the traditional credit system could potentially use alternative data as a path to building credit where they lacked one before.
For example, a consumer who gets a good credit score using an alternative data scoring method might now be able to get approved for an unsecured credit card, whereas they might have had to put down a deposit to get a secured credit card if the lender had only been able to use traditional credit data. This would allow the consumer to hold onto the cash they would have had to put down as collateral and instead save it for emergencies or some other use.
Applications of Alternative Credit Data
Consumers who are “credit invisible” but have a history of being financially responsible in other areas may benefit from the use of alternative credit data.
Although alternative credit data is still a relatively new field, major players in the credit industry are already working on developing new credit scoring tools that make use of alternative data.
FICO XD and FICO XD 2
FICO is working on developing new credit scoring models that can reliably assess the credit risk of consumers who are unscorable using traditional credit scoring methods.
The FICO Score XD “leverages alternative data sources to give [bankcard] issuers a second opportunity to assess otherwise unscorable consumers.”
Nerdwallet reports that the FICO XD model uses phone, utility, and cable payment data as well as things like information about your home if you are a homeowner, occupational licenses you may have, and your bank records.
Compared to traditional FICO scores, this model has the same credit score range of 300 to 850 and the same expected credit risk for each score group within that scale.
According to FICO, the XD scoring model can provide a score for more than half of all credit applicants that had previously been unscoreable, which adds millions of consumers to the scorable population.
Although only about a third of applicants that can be scored with FICO XD receive scores higher than 620, which is considered to be fair credit, the company claims that almost half of borrowers with higher FICO XD scores later go on to obtain credit and achieve traditional FICO scores of 700 or greater.
FICO XD’s newer version, FICO Score XD 2, works similarly but has been further refined to provide more accurate results.
Similarly, the FICO Score X incorporates alternative data sources for credit scoring, such as telecom payments, mobile payments, “digital footprint” data, and even data from psychological surveys to provide a way for international lenders to score previously unscorable consumers.
UltraFICO
The UltraFICO score, currently being pilot tested by Experian, will use “consumer-permissioned” banking data to enhance its scoring capabilities. In this case, what that means is that consumers can choose to contribute data about their checking, savings, and money market accounts in order to allow lenders to assess their creditworthiness by looking at their overall financial profile.
Some of the specific financial factors considered by the UltraFICO score include:
A history of positive bank account balances is a beneficial factor with the UltraFICO credit score.
How long you have had your bank accounts open How often you make banking transactions When your most recent bank account transactions occurred Verification that you often have money saved in your bank accounts A history of having positive bank account balances
FICO says this credit scoring model can help increase access to credit for “nontraditional borrowers” who have limited credit histories, particularly young consumers, immigrants, and those who are rebuilding their credit after experiencing financial distress.
The company also states that UltraFICO could potentially improve credit access for most Americans and could be especially helpful for those whose credit scores are in the “grey area” of the upper 500s and lower 600s or those whose scores just barely miss a lender’s credit score cutoff.
Seven out of 10 consumers who have had consistently positive banking habits in the past three months could get a higher UltraFICO score than their traditional FICO score, according to the company’s website.
Experian Boost Credit Score
Experian has also come up with their own alternative data solution called Experian Boost, which is a free service that allows users to provide access to their bank accounts in order to get credit for their on-time payments of bills such as electricity, water, gas, phone plans, cable, and even Netflix.
One major advantage with Experian Boost is that it only counts positive payment history, so missed payments will not hurt your score. If the program detects that you have missed a payment, it will remove that account from your credit file so that the late payment will not hurt your score.
Experian Boost lets you add positive payment history from your utility bills and some streaming services.
The New York Times has reported that the reason why Experian Boost does not consider negative information about your bills is that anything negative on your record will most likely end up on your credit report anyway, either because your utility provider may start reporting it to the credit bureaus or the account may get sold to a collection agency which then reports the collection account.
In addition, Experian says that you can disconnect your bank accounts if your FICO score decreases because of Experian Boost and that you can always reconnect your account later once your finances have improved.
According to Experian, consumers who sign up for Experian Boost receive an average boost to their FICO score of 13 points. Those who do not see a boost initially may see a larger effect over time if they keep their account connected as the program continues to check your account for payments you made on time and adding those to your credit profile.
If Experian Boost helps your credit but you later decide for whatever reason that you no longer want to use it, be aware that the positive payment history that was helping you will be removed from your credit profile, so it’s likely that your credit score will fall.
TransUnion FactorTrust
In 2017, TransUnion acquired FactorTrust, a company that provides lending data on short-term and small-dollar loans (e.g. payday loans), which are not reported in traditional credit reports and are often utilized by underbanked and credit invisible consumers.
This information will allow TransUnion to assess credit risk for a larger group of consumers.
In addition, TransUnion says that their small-dollar loan data will help lenders comply with the Consumer Financial Protection Bureau’s recent changes to payday lending rules meant to protect consumers.
Equifax DataX
In 2018, Equifax acquired a specialty credit reporting agency and provider of alternative credit data called DataX. Equifax stated that they plan to use DataX to help lenders improve financial inclusion and access to credit, especially for consumers who are underbanked.
DataX claims that they can help lenders better evaluate the credit risk levels of prospective customers by utilizing a “massive, proprietary consumer database that provides valuable insights on consumers not covered by traditional credit information sources.” This database contains demographic, financial, and credit data on millions of consumers.
The Downsides of Alternative Credit Data
In theory, alternative data sounds like a promising solution to the credit catch-22 and the problem of credit invisibility. According to FICO’s white paper on the subject, the use of alternative data allows millions of previously unscorable consumers to achieve credit scores that are high enough to get access to credit.
However, while the credit scoring and credit reporting companies only talk up the positives of their alternative data products, there are some drawbacks to this approach that also need to be considered.
Alternative Data May Perpetuate Credit Inequality
Although alternative data is marketed as a solution to credit invisibility, it’s possible that it could actually worsen credit inequality.
Despite FICO’s impressive claims, in the company’s white paper, we can clearly see how alternative data in credit scoring might not be so helpful to many consumers.
According to their research, about a third of the “newly scorable” consumers scored 620 or above using the alternative data score. These are the millions of consumers they refer to that may now be able to access credit.
But if only a third of consumers scored 620 or above, that means two-thirds of consumers now fall below 620 with the alternative data score, which is considered bad credit. That means there are twice as many of the newly scored consumers who end up with bad credit than those who end up with good credit after the alternative data model has been applied.
In many cases, having bad credit is even worse than having no credit, because instead of starting from scratch, you have derogatory information on your credit report that is going to weigh down your credit score. This can make it even more difficult to get your credit to a good place than if you had started with no credit history at all.
The results of FICO’s alternative data research bear out the concerns presented by the National Consumer Law Center (NCLC). According to the NCLC, if utility payments become part of the credit reporting system, this could result in millions of consumers getting negative marks and would disproportionately impact low-income consumers and people of color.
Although alternative credit data is pitched as a way to lift millions of consumers out of credit invisibility, in reality, it is another profit-generating tool created by the credit scoring and reporting companies to sell to financial institutions. Any benefit or harm to consumers is incidental to the primary goal of the banks making more money by lending to more consumers.
As you know from our article, “What Happened to Equal Credit Opportunity for All?” the credit scoring system was built upon and continues to perpetuate a history of financial inequality in our country.
Unfortunately, although it has the potential to help millions of consumers if implemented in the right way, it seems likely that alternative credit data may just end up being used to continue the legacy of inequality and discrimination that is still firmly entrenched in the credit industry and in our society in general.
Data Privacy Concerns
Another major concern with alternative data is privacy. In recent years, major data breaches have been happening left and right, including the 2017 Equifax breach that compromised the information of around 148 million consumers. The credit bureaus have shown with multiple egregious security breaches that consumers cannot trust them to safeguard their personal information.
Experian Boost, as well as other similar “consumer-permissioned” data reporting systems, require users to allow access to their bank account in order to report bill payments. For many, it may be hard to stomach the idea of giving FICO or the credit bureaus access to their personal information when they have repeatedly mishandled sensitive consumer data. Those who do choose to use such services do so at the risk of their information potentially being compromised.
Some Lenders May Not Use Alternative Data Credit Scores
Since alternative credit data is still a relatively new development, one downside is that many lenders may not be using alternative data or credit scores based on it in order to make their lending decisions.
The credit industry is slow to change, as we talked about in “Do Tradelines Still Work in 2020?”, so it may take several years for alternative credit data to be widely adopted.
Therefore, at this time, there is no guarantee that your lender of choice will have the ability to access and use your alternative credit data.
Conclusion: Is Alternative Data Helpful or Harmful?
Alternative data has the potential to lift millions of consumers out of credit invisibility, which is a step toward providing equal credit opportunity to these consumers.
However, it has just as much potential to harm consumers and perpetuate credit inequality due to the issues we discussed above.
As with any credit reporting or credit scoring tool, we have to remember who these tools are designed for and who they are intended to serve: the banks.
Ultimately, the purpose of alternative credit data is to help lenders make more money by lending to a greater number of consumers. For consumers, the benefits and risks are not so clear cut.
If you have no credit record or a thin credit file, alternative credit data scoring systems may be worth considering and trying out. As with any major credit moves, be sure to do your due diligence as a consumer by researching how these programs work and how you can protect yourself and your credit if you do not get the results you are looking for.
What is your take on the issue of alternative credit data? Have you tried any of these alternative data services yourself? Drop a comment below to let us know your thoughts!
Equality, fairness, and justice are all concepts that the United States promotes as some of its highest values.
In reality, the history of our country and society has not always lived up to those values. In fact, our history has proven to be so far from those ideals that we do not even need to mention how far off our society has been in our not so distant past.
Fast forward to now, and many people may believe that our country has worked out all those unfair and unequal practices. But the truth is that in our capitalist society, powerful private institutions provide the backbone of our economy, and the facts paint an interesting picture of how our financial systems really operate.
Do Credit Scores Actually Work?
For decades, lenders have been relying on automated underwriting tools that are largely or entirely based on the contents of one’s credit report. Do these tools succeed at their goal of accurately determining the creditworthiness of consumers?
What Do Credit Scores Do?
A credit score is a number that is supposed to symbolize the credit risk of a consumer. The scale usually ranges from 300 to 850, with lower scores indicating that you have a high risk of defaulting on a loan and higher scores indicating that you have a low risk of defaulting. Generally, credit scores that fall below 579 are considered bad credit, while scores that exceed 670 are considered good credit, and 850 is a perfect credit score.
Each type of credit score, such as a FICO Score or a VantageScore, has a different mathematical formula that uses the data in your credit report to produce your score, which represents the statistical likelihood of you defaulting in the future. The specifics of the credit scoring algorithms are trade secrets, so information about how exactly they work is not available to the public.
Credit Scoring Models Are Flawed
It is estimated that one-fifth of consumers have at least one error on their credit report that has the potential to make them look riskier than they are, which could result in higher interest rates, less favorable loan terms, or being denied credit. In other words, millions of people are negatively affected by inaccurate information on their credit reports.
Furthermore, it is well-known that in our credit system, consumers are rewarded for having debt and penalized for paying in cash, because taking on debt is one of the primary ways of establishing a payment history. You would think that being burdened with more debt would make you a higher credit risk, yet credit scoring models are designed to reward this behavior.
For example, many consumers are unpleasantly surprised to find out that sometimes paying off a loan can actually hurt your credit score. This is counterintuitive because it would seem that your credit risk has decreased now that you no longer have to make payments that loan, and therefore it would make sense for your credit score to go up as a result.
However, that is not how credit scores work. Here’s what really happens in this scenario: the action of paying off the loan would close the account and remove it from your mix of credit, which could have a negative effect on your score.
Clark Abrahams, Chief Financial Architect of SAS Institute, said it well in his testimony before the House Financial Services Committee, asking, “Are we to tell consumers that being responsible in their financial affairs means that they need to modify their behavior so as to maximize their credit score?”
The goal of a credit score is to indicate who is creditworthy and who is not, which should depend on an individual’s ability and willingness to repay an obligation. Yet this quality is not always reflected in one’s credit score. Instead, credit scores are based exclusively on what is and is not in one’s credit file, which often doesn’t tell the whole story.
Is the Credit Scoring System Fair and Equitable?
Just a few years ago, it was revealed that two of the three major credit-reporting agencies that control credit scores—Equifax and Transunion—had been deceiving and taking advantage of consumers.
If you’re familiar with the credit system, it’s not exactly shocking that the credit bureaus have been abusing their power. This is just one example of the dysfunction that runs deep in the credit system and causes widespread harm to consumers.
The Equal Credit Opportunity Act of 1974 was enacted in an effort to prevent discrimination in lending. In the 1970’s, people started to pay attention to credit discrimination against consumers based on age, race, gender, and other factors. In 1972, the National Commission on Consumer Finance revealed that there was widespread discrimination against women in the credit industry. A congressional report identified 13 discriminatory practices used specifically against women.
These discoveries led to the Equal Credit Opportunity Act (ECOA), which prohibits lenders from discriminating against any applicant on the basis of age, gender, ethnicity, nationality, or marital status. Regulation B of ECOA prohibits creditors from requesting information about certain characteristics to prevent lenders from making decisions based on prejudicial assumptions.
Officially, credit discrimination is prohibited. But it is not clear whether ECOA has succeeded in its goal, and many questions remain as to whether there is still inequality in the credit industry.
Is ECOA enforced effectively, or does discrimination still happen? Does the credit scoring system affect population groups differently? Do the factors used in calculating credit scores affect certain individuals grouped by race, gender, age, or other protected characteristics?
Unfortunately, the language of ECOA makes it virtually impossible for those who believe they have been discriminated against to win a lawsuit against a creditor, and the governing federal agencies have not picked up the slack in enforcing ECOA. There is no shortage of data showing that there is disparate treatment of certain groups when it comes to credit scoring.
This is because the credit scoring system not only reflects but perpetuates the economic inequalities in this country.
Who Are Credit Invisibles?
According to the Consumer Financial Protection Bureau (CFPB), about one-fifth of adults in the United States are “credit invisible,” meaning they are unscoreable by traditional credit scoring methods and traditional credit data. The lack of a conventional credit record prevents these consumers from obtaining the financial products and services they need to be successful, since they are seen by lenders as too high of a credit risk.
A study by the Policy and Economic Research Council (PERC) on credit invisibility in Silicon Valley showed that unscoreability is a big problem in low-income areas. However, low-income does not necessarily equate to financially irresponsible.
We can see evidence of this in a study by PERC and the Brookings Institution Urban Markets Initiative, which shows that when alternative data (such as rent and utility payment history) are used in credit ratings, those lacking a traditional credit history have similar risk profiles as those in the credit mainstream. This suggests that most credit invisible consumers do not represent a high risk to lenders.
On the other hand, some of these consumers do have relatively good incomes, but are credit invisible for various reasons, such as increased use of alternative financial technology services instead of traditional financial institutions, a decision to be voluntarily credit-inactive and debt-free, or a cash-based lifestyle due to lack of access to banking services (as in some immigrant populations).
Credit Scores and Income
Low-income consumers are about 8 times more likely than high-income consumers to lack credit records that are scoreable by widely used models. In consumers that do have credit scores, individuals who reside in low-income census tracts have lower credit scores than other income groups, according to the CFPB.
They also found that people in lower-income neighborhoods are less than half as likely as those in upper-income neighborhoods to gain a credit record by relying on the good credit of others (such as through joint accounts or authorized user accounts), and are 240 percent more likely to become credit visible due to negative records.
Lower-income consumers are less likely to have one or more AU accounts, and those that do acquire shorter credit histories from the accounts than those in higher-income areas.
Even after controlling for credit scores, consumers in low-income areas face higher denial rates than other groups.
How Credit Scoring Adversely Affects Certain Races
In a report to Congress on credit scoring and its effects on the availability and affordability of credit, the Federal Reserve Board (FRB) raised concerns that factors in credit-scoring models could adversely affect minorities.
The study determined that on average, blacks and Hispanics have lower credit scores than non-Hispanic whites and Asians, and a gap remained even when controlling for differences in personal demographic characteristics, location, and income.
In addition, for given credit scores, outcomes such as loan performance, credit availability, and credit affordability differed between these groups.
For example, it seems that black individuals pay higher interest rates on auto and installment loans than do non-Hispanic whites with the same credit score. In addition, black and Hispanic consumers experience higher denial rates than other groups with the same score.
Credit Scoring Discriminates by Age
Younger individuals tend to have lower credit scores, which makes sense considering that one of the main factors in credit scoring is the length of credit history.
Unfortunately, this means that young people who may be creditworthy are disadvantaged just by virtue of not being old enough to have a very long credit history. Younger consumers also experience relatively high denial rates.
Other Groups Marginalized by Credit Rating
The unequal effects of credit scoring are not limited to the above groups. It can affect consumers in surprising ways. For example, recent immigrants have lower credit scores than their performance would predict.
Credit invisibility is more prevalent in areas with less digital access to traditional financial service providers, such as in rural areas.
And since no federal law protects LGBTQ people from discrimination, they can still be denied credit with no option for recourse.
Why the Credit System Is Inherently Discriminatory
In the FRB’s report to Congress, they listed the “five C’s,” which are factors that seem to influence the variations in credit performance with race, age, gender, national origin, etc. The five C’s are:
Capacity: income available to pay off debts Collateral: the value of assets backing a loan Capital: the value of assets that do not explicitly back a loan but may be available to repay it Conditions: events that can disrupt income generation or create unexpected expenses that affect a borrower’s ability to make loan payments Character: the financial skills, experience, and/or willingness of a borrower that pertain to their ability to manage financial obligations
The way credit scores are determined privileges those who already have wealth, high incomes, education, and a support system of people who can help them out in a financial crisis.
In contrast, historical discrimination against minorities in the United States continues to affect each of the five C’s in ways that have serious and persistent consequences on credit scores.
In relying on and reflecting past inequality, credit scores also perpetuate that inequality.
According to the National Consumer Law Center, communities of color have less income and far less wealth than white Americans, thanks to centuries of discrimination and exclusion. Redlining, segregation in education, implicit bias in employment, and mass incarceration have prevented communities of color from attaining higher incomes and accumulating wealth.
The racial wealth gap makes it exponentially more difficult to recover from emergencies or financial setbacks. These inequalities take a toll on each of the 5 C’s, which in turn contributes to the higher proportion of credit invisibility and poor credit in minority communities.
Since credit scores are used in decisions that affect housing, insurance, employment, loans and more, poor credit scores mean consumers of color are disproportionately denied credit, affordable housing, jobs and other basic necessities. Expensive loan terms deplete capital and make loans much more difficult to repay, which continues the cycle of bad credit.
The system further burdens those who are already financially strained and provides very few opportunities to improve their situation.
Can We Fix Credit Scoring?
The credit scoring industry clearly has a multitude of problems. It’s no surprise that an inherently discriminatory system meant to serve for-profit companies has not produced equitable results.
Some believe that private companies shouldn’t even be the parties responsible for calculating credit scores. These for-profit corporations harvest our information, use closely-guarded proprietary algorithms to calculate credit scores, and sell this information to other companies in the financial sector.
Their clients are lenders, not consumers, so they do not have an incentive to fairly and accurately represent consumers. Perhaps a system in which this task falls to public institutions would be more accountable to consumers.
Pending currently is the Credit Access and Inclusion Act of 2017, a bill that would amend the Fair Credit Reporting Act to allow the reporting of rent, utilities, and telecommunication payment information to consumer reporting agencies. Even FICO has joined the discourse about financial inclusion, developing credit scores that include alternative data sources to allow millions of previously unscorable consumers a path to credit.
However, most lenders still use FICO 8, which is over 10 years old, so it would likely take a long time before scores that draw on more diverse data are widely deployed.
In addition, some civil rights and consumer advocacy groups argue that the addition of alternative data would actually “reduce consumers’ control over their own data by preempting state and federal privacy protections [and] damage the credit scores of millions of consumers with a disproportionate impact on African Americans.”
Perhaps what we really need is a broader conversation about how we judge creditworthiness and how we can create new tools that account for discrimination to create a more equal and just playing field. We need to question the assumption that past behavior is a true reflection of someone’s creditworthiness.
While the industry may be (very) slowly changing for the better, unfortunately, the faulty credit scoring system we have now will continue to negatively impact the lives of millions of people for years to come. That’s why we are driven to help provide solutions and opportunities to disadvantaged consumers.
How Do Tradelines Fit Into Equal Credit Opportunity?
Having good credit often comes down to having a good start in life and knowing how to play the credit game. Some people are born with access to wealth and education while others are not. People who don’t have the resources to start building good credit early on often get stuck in the downward spiral of a broken system that leaves them little room to improve their financial situation.
When people make mistakes, as we all do sometimes, these mistakes have a much greater impact on those who lack good credit than on those who have been playing the credit game for years.
The gap between classes in society is getting larger, as opposed to our country’s ideal of promoting equality. In reality, the wealthy are the ones who receive the most help and opportunity.
Our society has become a credit-based society in which credit scores affect almost every aspect of our lives, yet there are clear “winners” and “losers” in our credit scoring system. Statistically, there are clear indications that these differences are not spread out equally across our country.
Good credit is something that many privileged Americans start out with in early adulthood because of the family they were born into. This is no secret among the wealthy.
On the other end of the spectrum, many lower-income families do not have family members with good credit that they can ask to help them build credit by adding them as an authorized user on a credit card. This option simply does not exist to many, while the banks encourage it for others.
To us, it does not seem fair that some people have this option but others do not. Tradeline Supply Company, LLC seeks to bridge this gap by helping to provide a chance at equal credit opportunity for all.
What do you think about the credit system and equal credit opportunity? If you liked this article, please share it or leave us a comment below!
FICO, the company behind the creation of the original FICO credit score and its many subsequent iterations, has announced the latest model in their line of credit scoring algorithms: the FICO Score 10 and the FICO Score 10 T. The “T” in the latter scoring model stands for “trended,” which reflects the incorporation of trended data over time into the algorithm.
Thanks to not only the trended data but also a few other major changes, the new scoring models are claimed to be superior to all previous FICO scores.
Although the majority of consumers are not likely to see a dramatic change in their credit scores, some groups of consumers may experience more extreme shifts. Ultimately, the new FICO scores are predicted to widen the gap between consumers with good credit versus those with bad credit.
However, none of that matters until FICO 10 and 10 T actually start being used, which could still be a few years away.
Keep reading to get all the facts on FICO 10, including what makes it different from previous FICO score versions, the impact it will have on credit scores, and when we will start to see lenders adopting it. Most importantly, we’ll tell you how to get a good credit score with FICO 10.
Why Did FICO Come Out With a New Credit Scoring Model?
The whole point of a credit score is to communicate a consumer’s level of credit risk to lenders so that lenders can make less risky decisions when granting credit. Lenders want to avoid extending credit to borrowers who are likely to default on a loan because defaults represent losses for the company.
So, the more accurate a credit scoring model is at predicting consumer credit risk, the more useful it is to lenders. With a predictive credit scoring model, lenders can make more informed lending decisions, which helps their bottom line.
For this reason, the goal of each new credit score is to make it better than the last version at predicting credit risk, and that is exactly what FICO 10 is designed to do.
Consumer Debt Is on the Rise—But So Are Credit Scores
According to The Balance, consumer debt has increased to record levels, and yet the average credit score in the United States has also increased to 706 as of September 2019. This can be attributed partly to economic conditions over time, but there is another major factor that has the banks worried.
The national average FICO score has been on the rise for the past decade and it surpassed the 700 mark in 2018.
It has now been 12 years since the Great Recession of 2008, which means almost all of the delinquencies and derogatory marks on consumers’ credit reports from that period of financial hardship have been removed from their records. Therefore, creditors can no longer see how consumers handled the recession and whether they were able to pay all of their bills when the economy went south.
Couple this with the fear of another possible economic recession on the horizon, and you can understand why lenders have started to feel concerned that delinquencies and defaults may soon begin to rise to a level that is not reflected in consumers’ high credit scores.
Because of these economic factors, the credit scoring system needed an overhaul that would take into account the changing economic climate as well as changing consumer behavior and allow for better predictions of credit risk and default rates.
FICO 10: More Accurate Predictions of Credit Risk
FICO predicts that FICO 10 will lower defaults on auto loans by 9% and defaults on mortgages by 17%.
Due to the changes made to the scoring model that we discussed above, especially the inclusion of trended data for the FICO score 10 T, FICO claims that the new scores perform better than all previous FICO scores by substantially lowering consumer default rates.
Here’s what else FICO has to say about their new products:
“By adopting the FICO® Score 10 Suite, a lender could reduce the number of defaults in their portfolio by as much as ten percent among newly originated bankcards and nine percent among newly originated auto loans, compared to using FICO® Score 9. The reduction in defaults is even higher for newly originated mortgage loans, at 17 percent compared to the version of the FICO Score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.”
How Is FICO 10 Different Than Previous FICO Scores?
Although FICO routinely updates their credit scoring algorithms every five years or so, this will be the first time that they are releasing two different versions of the same general scoring model: FICO 10 T, which uses trended data; and FICO 10, which does not use trended data.
Both FICO 10 and FICO 10 T will be drastically different than the previous FICO score, FICO 9. FICO 9 was designed to be very forgiving to consumers, which led many to believe that it produced credit scores that were higher than they should have been.
With FICO 9, for example, medical collections were given less weight than other types of collections, which was a benefit to consumers struggling with medical debt.
Furthermore, FICO 9 completely ignored paid collection accounts, meaning that if you had a collection on your credit report but then paid the balance, it would no longer affect your credit score. Many felt that this change contributed to FICO 9 overestimating the creditworthiness of consumers, which in turn led to the scoring model not being accepted by many industries.
In contrast, the FICO 10 scores represent a swing back in the opposite direction. It is designed to be less lenient toward consumers with risky credit behaviors in order to avoid understating consumers’ credit risk. In that sense, it is probably more similar to FICO 8 than to FICO 9. However, FICO 10 also rewards consumers who have successfully managed their credit.
To accomplish this, FICO made some significant changes in creating their latest set of credit scoring algorithms.
Trended Data
The new FICO 10 T score is the first FICO score to look at trended credit data.
The FICO 10 T score will incorporate trended data, which means that it will not just consider your credit profile as a “snapshot” in time, but rather, it will take into account your credit behavior over the previous 24 to 30 months and how your credit profile has changed in that time.
VantageScore 4.0, a competing credit scoring model, has been using trended data since it debuted in 2017. Now, FICO is following suit with their 10 T score.
Because of the more extensive temporal data set FICO 10 T has to draw from, it is even more predictive of a borrower’s credit risk than the basic FICO 10 score, which can only see a “snapshot” of your credit report at a given point in time.
For consumers, the trended data factor is especially significant for the credit utilization portion of your credit score. Of course, credit scores already looked at your payment history from the past seven to 10 years, but until now, they only looked at your credit utilization ratios at a given point in time.
This means that with most credit scoring models, even if you max out your credit cards one month and your credit score suffers as a result, as long as you pay down your cards again by the next month, your score can still bounce right back to where it was before you maxed out the card.
With FICO score 10 T, however, it won’t be so easy to recover from high balances, because a record of being maxed out could stick around for the next 24 to 30 months.
In addition, if your balances have been climbing higher over the last two years or if you have been seeking credit more aggressively, you could be penalized by FICO 10 T, because this kind of behavior indicates a higher risk of you defaulting in the future.
On the other hand, if you have been managing your credit well and your debt levels have been decreasing over the past two years, you will be rewarded for that behavior.
Personal loans from online lenders have exploded in popularity, but it’s best to avoid them if you want to get a high FICO 10 credit score.
Personal Loans Will Be Penalized
The vice president of scores and analytics at FICO, Joanne Gaskin, has said that the most significant change to the scoring algorithm is the way it treats personal loans.
Personal loans are growing faster than any other type of consumer debt, even credit cards. Consumers are turning to personal loans to consolidate credit card debt more frequently than in the past, and the proliferation of financial technology companies has made personal loans easier to qualify for and more accessible.
With older FICO models, personal loans are treated the same as any other installment loan. Since the balances of installment accounts don’t affect credit scores as much as the utilization ratios of your revolving accounts, with most scoring models, taking out a personal loan to consolidate credit card debt (essentially converting revolving debt into installment debt) would benefit a consumer’s credit score.
However, many consumers who take out personal loans to pay off revolving debt don’t change the spending habits that got them into debt in the first place. Consequently, after getting a personal loan and paying down their credit cards, they may run up their cards again and find themselves even deeper in debt.
According to FICO, the credit risk of such consumers is higher than you would think based on their credit scores using previous FICO models. To account for this, FICO 10 is treating personal loans as their own category of credit accounts and is potentially penalizing consumers for taking out personal loans.
With FICO 10 T, recent missed payments will matter even more than they already do with other FICO score versions.
Therefore, with FICO 10, the strategy of consolidating credit card debt with a personal loan might not help your credit score as much as you hope and might even hurt it. However, the negative impact of taking out a personal loan can be mitigated by steadily working to reduce your overall debt level.
On the other hand, if your overall debt load stays the same or continues to increase after you take out a personal loan, that could hurt your credit score because it shows lenders that you are getting deeper into debt and not managing your credit well.
Recent Missed Payments Will Be Penalized More Heavily
Payment history has always been the most important part of a FICO credit score, but it is even more important with FICO 10 T, the trended data score.
Using historical data, it can assign late and missed payments even more weight based on your behavior in the past 24 months. For example, if you’ve been getting progressively farther behind on payments over time, the negative impact on your credit score could be even greater than it would with a previous FICO score.
If you have delinquencies that are at least a year old, though, then those older negative marks on your credit report won’t hurt your score as much, according to MSN.
How Will the FICO 10 Scoring Model Affect Credit Scores?
Overall, it is predicted that the new FICO 10 scoring models will have a polarizing effect on consumers’ credit scores, which means that some consumers who have bad credit scores may see them drop even further, while those who have good credit scores because they are on the right track may be rewarded with even higher scores.
40 million consumers are likely to experience a credit score drop of 20 or more points with FICO 10 compared to previous models. This could push some consumers over the edge into a lower credit rating category.
FICO has estimated that approximately 100 million consumers will probably experience minor changes of less than 20 points to their scores. The company also estimates that about 40 million consumers will see their credit scores drop by 20 or more points, while another 40 million could see their scores increase by the same amount.
You are likely to see a credit score drop if you took out a personal loan to consolidate debt but then kept accruing more debt instead of paying it off, or if you have credit card debt that you are not paying down.
You are most likely to see a credit score increase if you have been penalized for having high balances from time to time, since the temporal data from FICO 10 T will help to average out the peaks in your utilization rate.
While a decrease of 20 points in your credit score isn’t catastrophic, it could be enough to make a difference in your chances of being approved for credit or the interest rates you could qualify for. This is especially true for those whose credit scores sit near the lower border of a credit score category.
For example, if someone with a credit score of 595 with FICO 8 is considered to have fair credit. If FICO 10 gave them a credit score that is 20 points lower, their credit score would be 575, which is considered bad credit. That could very well make or break your chances of getting approved for a loan or a credit card.
On the other hand, the inverse is true for those who stand to gain 20 points. If a 20 point increase pushes a consumer over the edge from fair credit to good credit, for example, this could certainly be beneficial when applying for credit.
It’s estimated that 80 million consumers will see a significant change in their credit scores with FICO 10, which may move them into different credit score ranges.
Less Severe Score Fluctuations
As you may recall from How to Choose a Tradeline, the more data there is contributing to an average, the more difficult it is to affect that average.
Since FICO 10 T looks at your credit utilization for an extended period of time instead of just the current month, it is likely that your credit score will not change as drastically from month to month based on your utilization ratios at the time.
In other words, your utilization data from the past 24 to 30 months will have a stabilizing effect on your score that will protect it from being heavily penalized if you occasionally have high balances. For example, if you spend extra on your credit cards in December to prepare for the holidays, your score that month won’t be hurt as much as it would without the trended data (as long as you pay it off quickly).
Greater Emphasis on Trends and Recent Data
FICO 10 T will especially reward consumers who have a trend of improving their credit over time.
The inclusion of trended data with FICO Score 10 T and extra emphasis on recent data means that your credit score is not based solely on what your accounts look like today, but instead, it will give more importance to whether your credit is getting better or getting worse.
Hypothetically, it’s possible that two consumers with the same amount of debt and derogatory items could have different credit scores based on the trend in their debt levels.
If one consumer has $10,000 of credit card debt, but they have been making progress on paying that down from a starting point of $20,000 of debt, then their credit score would be helped by FICO 10 T because their debt level is demonstrating a trend of improvement over time.
If the other consumer also has $10,000 of credit card debt, but they used to only have $1,000 of revolving debt, that trend shows that they are getting deeper into debt, and their FICO 10 score would be hurt by that pattern of increasing debt.
A Polarizing Effect on Credit Scores
One of the major effects of FICO 10 is that it is likely going to polarize the pool of consumers’ credit scores. In other words, those near the top of the credit score range will get even higher, while those with low credit scores will sink even lower along the scale.
According to CNBC, consumers with scores of lower than 600 will experience the largest reductions in their credit scores with FICO 10. Those with scores of 670 and above could possibly gain up to 20 points.
This creates a distribution of credit scores that is more concentrated at the two extremes, as opposed to most consumers’ credit scores being concentrated around the average.
Unfortunately, that means the negative effects of the new FICO scores will disproportionately impact consumers who are already struggling with debt. This will make it even harder for consumers to get out of debt and may force them to seek out costly, predatory loans, which only accelerates the downward spiral of debt.
This perpetuation of inequality in the credit scoring system is not new, but it seems that FICO 10 will only serve to increase credit inequality rather than improve it.
Ultimately, FICO’s clients are the banks, and their products are designed to give banks the upper hand, not consumers.
When Will the New FICO Score Be Rolled Out?
By widening the divide between consumers with good credit and those with bad credit, it seems that FICO 10 will exacerbate credit inequality.
According to FICO, the FICO Score 10 Suite of products will be available in the summer of 2020. The vice president of scores and predictive analytics at FICO, Dave Shellenberger, told The Balance that Equifax will be adopting the new score shortly thereafter.
As to when lenders will actually start to use the new credit scoring system, that is a different question.
Lenders Are Slow to Adapt to New Credit Scoring Systems
The financial industry adapts very slowly to systemic changes. As we discussed in “Do Tradelines Still Work in 2020?”, there are many, many different versions of FICO, and the majority of lenders are still using versions of the score that are years or even decades old.
Before FICO 10, the latest version had been FICO 9, which has largely gone unused by lenders.
FICO 8 is the credit scoring model that is currently being used by the three major credit bureaus and it is also the most widely used model among lenders today. FICO 8 debuted in 2009, which means it has now been around for over a decade.
There are certain industries that rely heavily on FICO score versions that are even older than FICO 8. In the mortgage industry, the most popular FICO scores are versions 2, 4, and 5, the earliest of which debuted in the early 1990s. Auto lenders may use FICO scores 2, 4, 5, or 8, while credit card issuers use models 2, 3, 4, 5, and 8.
Furthermore, many industries and even some large lenders have their own proprietary FICO scoring models which have been customized for that particular institution and the consumer base they serve.
Lenders have amassed huge troves of data based on a specific credit scoring model. Having reliable data is crucial to minimizing risk during the underwriting process. If lenders were to change to a new scoring model, all of the credit scoring information they have collected so far would no longer be applicable, since it was calculated using a different algorithm.
It is likely that the FICO 10 T score will take longer to implement than the basic FICO 10 score because FICO 10 T will require businesses to train employees to use a new set of reason codes.
They would essentially be starting from scratch, which would mean taking on more risk until they have tested the new model for long enough to understand how it works for their businesses. Because of this, lenders are often reluctant to upgrade to a newer scoring model and slow to implement it.
Therefore, we can make an educated guess that it will most likely take at least a few years for FICO 10 to gain traction with lenders on a large scale. According to Shellenberger of FICO, it may take “up to two years” before lenders start using the new model, although based on past examples, it seems likely that it could take a lot longer than that.
FICO 10 T Will Be More Challenging for Lenders to Adopt
According to FICO, the standard FICO 10 score uses the same “reason codes” as older FICO scores. Reason codes, also referred to as “adverse action codes,” are the codes that lenders must provide if they have rejected your application for credit based on information from your credit report. These codes usually consist of a number and a brief statement of something that is impacting your score in a negative way, such as revolving account balances that are too high compared to your revolving credit limit.
Because FICO 10 shares the same reason codes with previous versions of FICO scores, this means it will be compatible with lenders’ current systems, at least with regard to reason codes.
In contrast, FICO 10 T comes with a new set of reason codes, which means it will be a more extensive undertaking for banks to implement the new score and train employees on how to use it.
For this reason, it seems likely that the basic version FICO 10 may see widespread use among lenders before FICO 10 T does.
How to Get a Good FICO 10 Credit Score
Although some significant changes have been made to the FICO 10 credit scoring products, the overall principles of managing credit remain the same. Most importantly, make all of your payments on time, every time, and try to keep your credit utilization low.
However, there are a few specific points to keep in mind if you want to get a good credit score with FICO 10.
Think twice about taking out a personal loan
Since personal loans will be more heavily penalized with FICO 10 scores, you’ll want to avoid taking out a personal loan unless it’s absolutely necessary. Instead of relying on personal loans to support your spending, try to save up for large purchases in advance, and start funneling some cash from each paycheck into an emergency fund in case you run into financial hardship.
If you do end up needing to use a personal loan, try to pay it down as quickly as you can. In addition, don’t run up the balances on your revolving accounts again, because the FICO 10 T algorithm does not reward this behavior, and your credit score will reflect that.
Consider setting up automatic payments for all of your accounts so that you never accidentally miss a payment.
Never miss a payment
Avoiding late or missed payments is of the utmost importance with any credit score, but it is even more important with the new FICO scoring system. Late and missed payments may be assigned more weight based on your recent credit history, especially missed payments that occurred within the past two years.
To avoid missing any payments, set up all of your accounts to automatically deduct at least the minimum payment from your bank account before your due date each month. Also, it’s a good idea to get into the habit of checking your accounts regularly to make sure there haven’t been any errors or issues with processing your automatic payments.
If you do accidentally miss a payment, pay the bill as soon as you notice and consider asking your lender to waive the late fee. If you manage to catch up before 30 days have gone by, then you can avoid getting a derogatory item added to your credit report.
In the event that you find yourself with a 30-day late (or worse) on your credit report, then you will need to be extra vigilant about making payments on time for at least the next one to two years if you want your score to recover.
Pay off your credit cards in full every month
Paying off your credit cards in full is always a good idea in general because that way, you can avoid wasting money on interest fees. In addition, paying off your full balance each month prevents your credit utilization from increasing from month to month, as opposed to carrying over a balance and then adding more to it each month.
With trended data playing a large role in your FICO 10 T score, consistency is key, and paying your bills in full every time will help boost your score.
If you want to get a good credit score with FICO 10 and FICO 10 T, try to keep your revolving debt low by paying off your credit cards in full every month.
Lower your credit utilization ratios
With FICO 10 T, it will be more important than ever to be vigilant about maintaining a low credit utilization ratio. Since the trended scoring model accounts for patterns in your credit utilization over the past 24 months, it won’t be so easy to get away with maxing out your credit cards one month and then quickly paying the balance down to improve your score again the next month.
High credit utilization at any point in the past two years could be factored into your credit score, especially if your utilization has been increasing over time.
For this reason, if your credit is being scored with the FICO 10 T model, you’ll get the best results if your credit utilization has been consistently low or if it has shown a pattern of decreasing over time.
However, just because you pay off your credit card in full every month doesn’t mean it will report a zero balance. The balance that reports to the credit bureaus is the balance that you have at the end of your statement period. If your balance happens to be high on that date, then it could negatively affect your score, even if you pay off the balance soon after.
One way to get around this is to pre-pay your credit card bill before your due date and your statement closing date. That way, the balance will be low when the card reports to the credit bureaus, which is better for your credit score.
Another helpful credit hack is to spread out multiple smaller payments throughout the month so that the balance never climbs too high to begin with.
Requesting a credit line increase can be an easy way to improve your utilization rate, but this method should be used with caution if you think it might encourage you to rack up more debt.
Increase your credit limit
One way to easily lower your utilization rate is to increase your credit limit. Spending $1,000 on a card with a credit limit of $5,000 is a lot better than spending the same amount on a card with a credit limit of $2,000.
Increasing your credit limit might be easier than you think. It could be as simple as calling up your card issuer on the phone or applying for a credit line increase online. Most people who ask for a higher credit limit get approved, according to creditcards.com.
However, this strategy is not encouraged for consumers who may be tempted by the higher credit limit to spend even more on the card.
For tips on how to get a larger credit limit, as well as some pitfalls to watch out for before requesting an increase, check out “How to Increase Your Credit Limit.”
Work to improve your credit health over time
With FICO score 10 T including more information about your credit history over the past 24 months, it will be important to demonstrate an improvement in your credit over time. Consumers who have been working to manage their credit responsibly and who have reduced their amount of revolving debt over time will be rewarded.
On the other hand, those whose credit health has been declining due to increasing debt levels or a series of missed payments will see their credit scores take a dive.
Will the New FICO 10 Score Affect the Tradeline Industry?
First, remember that it’s likely that it’s going to take at least a few years for FICO 10 to be widely adopted by lenders (if lenders choose to use it in the first place, which they may not), which means that nothing is changing for the tradeline industry in the near future.
Secondly, many lenders may choose to adopt only FICO 10 and not FICO 10 T because it will be technically easier to implement. For lenders using FICO 10 without the trended data, there is no change to how authorized user tradelines work.
However, things get more interesting when considering the impact of FICO 10 T on buyers and sellers of tradelines. Until FICO 10 T is adopted by major lenders, we can only speculate as to the changes that will result, but here is one possibility.
What If FICO 10 T Reveals a Tradeline’s Balance History?
One concern that consumers may have is that FICO 10 T will expose a tradeline’s previous high balance if it had one at any point during the past 24 to 30 months. That may be true, but we also know that FICO 10 T places a lot of importance not just on the numbers themselves, but on how they change over time.
All of the tradelines on our tradeline list are guaranteed to have a utilization ratio of 15% or lower. If a tradeline had a higher balance at some point in the past two years or so, then it would show a trend of the balance decreasing, since the balance would have been brought down to under 15% in order to participate in the tradeline program.
FICO 10 T rewards downward trends in utilization, so it seems that authorized user tradelines would still provide value even if higher balances can be seen in the past.
If a tradeline has not had a high balance in the past two years, then that means it will show a pattern of consistently low utilization, which is also beneficial.
Conclusion: What Does the New FICO 10 Credit Score Mean for Consumers?
A lot of speculation and bold claims have been circulating about the new FICO scores, FICO 10 and FICO 10 T. Naturally, consumers and tradeline sellers alike are concerned with the question of how these new scores might affect authorized user tradelines.
It is true that FICO has made some significant changes to their latest credit scoring model, and it’s also likely that some consumers may experience marked increases or decreases in their credit scores compared to previous FICO scoring models. Fortunately, however, there is no need to panic.
Follow the general guidelines of good credit to get a high score with any credit scoring model.
First, let’s remember that FICO 10 is not in use yet, and it’s probably going to take a few years or more for the majority of lenders to adopt it. In addition, the scoring model that people are most concerned about, FICO 10 T, will take even longer than FICO 10 to reach mainstream popularity since it requires lenders to learn how to start using a new set of reason codes.
For this reason, consumers do not need to worry about lenders seeing the past two years of their credit histories just yet. However, knowing that widespread use of trended data may be on the horizon, you may want to start preparing your credit now. That way, when trended data credit scores become more popular, your credit will be strong and ready to withstand the changes.
To achieve a high credit score with FICO 10 and FICO 10 T, avoid taking out personal loans if you can, as they will be penalized more heavily than in the past. It’s also important to demonstrate either an improvement in your credit over time or consistently good credit habits, which will be rewarded.
Aside from these special considerations, FICO 10 and FICO 10 T still rely primarily on the same credit score factors you are already familiar with: payment history, credit utilization, length of credit history, credit mix, and new credit. While the peripheral details of different scoring models may vary, the core components always remain the same.
Ultimately, if you work on developing good credit practices in these general areas, your credit will be in great shape no matter which scoring model is used.
One question we often hear is “Do tradelines still work in 2020?”
Fortunately, we can say with certainty that tradelines do still work in 2020, and we are confident they will continue to be effective for years to come.
To explain our answer, we will delve into the history of authorized user tradelines and the policies that regulate the tradeline industry.
Why Do Tradelines Work?
Although the term “tradeline” could refer to any account in your credit file, usually in our industry people use the word as shorthand for authorized user tradelines, or accounts on which you are an authorized user.
Credit card companies allow cardholders to add authorized users (AUs) to their accounts, which are people who are authorized to use the account but are not liable for any charges incurred. For example, a business owner could add an employee as an AU of their credit card, or a parent could add their child.
When someone is added as an AU, often the full history of the account is shown in the credit reports of both the primary user and the AU, regardless of when the AU was added to the account. Therefore, the AU may have years of credit history associated with the account reflected in their file as soon as they are added.
This is why obtaining an AU tradeline through a family member or friend is a common way for people to start establishing a credit history. In fact, studies estimate that 20-30% of Americans have at least one AU account.
Why are authorized users able to share the benefits of the primary user’s credit rating, even though they are not liable for the debt? This policy is a result of the Equal Credit Opportunity Act of 1974 (ECOA).
Before ECOA was passed, creditors would often report accounts shared by married couples as being only in the husband’s name. This prevented women from building up a credit history and credit score rating in their own names, which in turn prevented them from being able to obtain credit independent of their husbands.
In response to this unequal treatment, ECOA was passed to prohibit discrimination in lending. The federal law made it illegal for creditors to discriminate on the basis of sex, marital status, race, color, religion, national origin, age, or receipt of public assistance.
This means that creditors may not consider this information when deciding whether or not to grant credit to an applicant or determining the terms of the credit.
ECOA was passed in large part to prevent creditors from discriminating against women and to provide equal credit opportunities to women.
Regulation B is a section of ECOA that specifically requires that creditors report spousal AU accounts to the credit bureaus and consider them when lenders evaluate a consumer’s credit history.
Generally, creditors do not distinguish between AUs that are spouses and those that are not when reporting to the credit bureaus, which effectively requires the credit bureaus to treat all AU accounts in the same way.
As a result of this policy, the practice of “piggybacking credit” emerged as a common and acceptable way for individuals with good credit to help their spouses, children, and loved ones build credit or improve their credit.
The practice of piggybacking is the foundation of the tradeline industry. In a piggybacking arrangement, a consumer pays a fee to “rent” an authorized user position on someone else’s tradeline. The age and payment history of that tradeline then show up on the consumer’s credit report as an authorized user account.
Are Tradelines Legal?
It is understandable that there is some confusion about this since not many people are aware of the idea of tradelines for sale, although the practice has been in use for decades.
While Tradeline Supply Company, LLC cannot provide legal advice, we can refer to several official sources, including the Federal Trade Commission, who have indicated that it is legal to buy and sell tradelines.
While tradelines are not illegal, historically, they have not been accessible to everyone. The high cost of tradelines meant that only the wealthy could afford to purchase tradelines for credit piggybacking. Today, however, innovations in the industry have lowered the cost of tradelines, making them affordable to a much wider audience.
Tradeline Supply Company, LLC is proud to be leading the tradeline industry in automating the process of buying and selling tradelines, offering some of the lowest tradeline prices in the industry, educating consumers on the credit system, and making tradelines accessible to everyone.
Our goal is to provide equal opportunities to those who do not have access to authorized user tradelines through friends and family by providing an online platform that allows for a greater network of connections.
But Didn’t Credit Card Piggybacking Get Banned?
Fair Isaac Corporation (FICO), the creator of the widely used FICO credit score, did try to change its scoring model to eliminate the benefits of authorized user tradelines, although they were ultimately unsuccessful. The firm announced that they were planning to devise a way to allow “real” AUs to keep the benefits of their AU tradelines while at the same time discounting the value of AU tradelines for consumers who FICO deemed to be “gaming the system.”
FICO admitted to Congress that they could not legally discriminate between AUs based on marital status due to ECOA.
While this statement understandably caused a lot of concern among consumers of tradelines, as it turns out, FICO was never able to implement this change in their scoring system.
At a congressional hearing in 2008, Fair Isaac’s president admitted that they could not legally distinguish between spousal AUs and other users, because discriminating based on marital status would unlawfully violate ECOA.
After consulting with Congress and multiple federal agencies, FICO was blocked from discriminating against AU account holders. Consequently, all AU accounts are still being considered in FICO 8, the most widely used credit scoring model.
In addition, studies have shown that accounting for AU data helps make credit scoring models more accurate, so it is actually in FICO’s best interest to continue including all AU accounts in their credit scoring models.
In working with thousands of consumers over the years, our results prove that in 2020, AU tradelines still remain an effective way to add information to an individual’s credit report, regardless of the relationship between the primary user and the authorized user.
Here’s another piece of evidence that proves that authorized user tradelines still work in 2020: many banks actually promote the practice of becoming an authorized user for the specific purpose of boosting one’s credit score. To see this for yourself, all you need to do is go to any major bank’s website and search for “authorized user.” You are almost guaranteed to see several articles pop up that talk about becoming an authorized user in order to build a credit history.
How Do We Know Tradelines Will Continue to Work in the Future?
Most widely used credit scoring models still include authorized user “piggybacking” accounts.
Given that FICO has already targeted the tradeline industry before, it makes sense to wonder whether tradelines will still work in the years to come if FICO eventually does succeed in coming up with a way to discriminate against certain AUs.
Thankfully, we can rest assured in knowing that the tradeline business will be around for a long time. The reason that we can be sure of this is that the credit industry is extremely slow to adapt, so even if FICO were to roll out a new credit score model that can tell which AUs purchased their tradelines, it would take years, if not decades, for this new credit score to be adopted across the entire financial industry. Let us explain why this is the case.
Credit scoring is a complicated process, and all lenders have their own guidelines when it comes to underwriting. FICO has many different scoring models, and the specific versions used to evaluate credit applicants vary widely between different industries and even between individual lenders within the same industry.
Currently, the three major credit bureaus (Equifax, Experian, and TransUnion) use the version called FICO 8, which debuted in 2008. Consequently, this is also the version that most lenders use for measuring consumer risk for various types of credit, such as personal loans, student loans, and retail credit cards.
However, according to FICO, the mortgage industry still relies on the much older FICO score models 2, 4, and 5. Auto lenders sometimes use FICO 8, while many still use FICO 2, 4, and 5. Credit card companies may use versions 2, 3, 4, 5, and 8.
As if this isn’t complicated enough, many lenders also use proprietary credit-scoring guidelines specific to their businesses. As FICO’s website says, “It is up to each lender to determine which credit score they will use and what other financial information they will consider in their credit review process.”
As you can see from the wide range of versions used, lenders are extremely slow to adapt to changes in FICO’s credit scoring model. In addition, their underwriting processes have been built around previous versions of FICO. All of the credit score data they have accumulated over time is only accurate for the particular version that was used to calculate it.
Transitioning to a completely new credit score model would require businesses to expend significant resources on updating their technological systems, collecting and analyzing new consumer data, training employees, and possibly incurring financial losses as a consequence of not being able to rely on the consumer data they collected while using older credit score models.
For these reasons, most lenders tend to be very reluctant to introduce the latest FICO credit scoring model.
Lenders use credit scoring models that are specific to their industries, so they tend to resist changing to newer models. Photo by InvestmentZen.
So, even if FICO were to successfully eliminate authorized user data in future credit scoring models, it is likely that it would take years or even decades for lenders to adapt to this change.
In addition, as the 2008 congressional hearing showed, FICO will face pushback from the federal government if they try to eliminate authorized user benefits again. It is highly unlikely that a large company like FICO would want to risk being shut down by the federal government for violating the law.
Consumers wouldn’t stand for it, either. In the Washington Post, J.W. Elphinstone wrote, “Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed… there’s no way to distinguish these from the latest crop of strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.”
Final Thoughts
When FICO took the issue of piggybacking all the way up to Congress in 2008, they made headlines in their fight against the practice.
This was also during the same time that the subprime mortgage meltdown began which preceded the Great Recession. The entire mortgage industry had to be overhauled and many people assumed that the tradeline industry went down along with it.
What did not make headlines is that FICO’s push to do away with the authorized user tradeline industry actually failed due to the government upholding ECOA and the FTC affirming that the practice of buying and selling tradelines is allowed.
The banks themselves even promote credit card piggybacking among friends, family, and co-workers.
Most of the time when I’m asked about credit scores the line of questioning is commonly about how to improve scores. It’s equally often, and equally enjoyable, when I receive questions from people about how many points certain things from your credit reports are worth to their credit scores. The questions generally go something like this… “How many points is a charge off worth” or some variation of that question.
Not only are these questions common but they are also reasonable. We grow up in an academic environment where questions on tests are worth a certain number of points toward our final grade. For example, if you have a test with 25 questions then each question is worth 4 points for a possible grade of 100. Credit scoring systems, however, are not designed such that entries on your credit reports are worth any specific number of points.
That’s Not How Credit Scores Work
If you ever read a book or blog or hear someone suggest that credit report entries are worth a specific number of points, you can ignore it because it’s factually inaccurate. Nothing on your credit report is worth any specific number of points, either positive or negative. Scoring models do not assign points like that because they’re not designed to do so.
Instead, credit scoring models assign points based on how well you have performed in certain credit scoring categories. Without getting highly technical and jargon-heavy, points are assigned based on how your credit reports answer questions asked by the credit scoring models.
Buckets, Bins, Variable Classing…They’re All the Same Thing.
Credit scoring models are made up primarily of three things…characteristics, variables, and weights. These three things can also be described as…questions, answers, and points. These three work in concert as part of the scoring process. Here is an example of how it works:
Characteristic (aka, a question asked by the scoring model)
Example: How many credit card accounts do you have with a balance greater than zero?
Variable/Bucket (aka, the answer from your credit report)
Example: I have 4 credit card accounts with a balance greater than zero.
Weight (aka, the points assigned by the credit scoring model based on the answer)
Example: If you have between 3 and 6 credit card accounts with balances, you earn 20 points. As such, because you have 4 cards with balances you have earned 20 points.*
*This fictitious example isn’t meant to mimic the points you’ll earn for having four credit card accounts with balances. It’s simply meant to illustrate how scoring models work.
The variable or “answer” component is also commonly referred to as a bucket or bin. It’s essentially a range where the answer to a credit scoring characteristic/question falls. And, the weight or points are assigned based on which bucket/range your answer falls.
I recognize that this is complex and it might take you a few times reading through this to understand how it works. But, at the very least what this should expose is the truth that no item on your credit report is worth “x” points.
Instead, the bucket/range where your answers fall is what’s worth the points. And, you may have several answers that would cause you to fall into the same bucket, meaning multiple consumers with different credit reports can have the same credit score.
In the above example, the variable bucket was “between 3 and 6 credit card accounts with balances.” And, that bucket was worth 20 points to your credit score. So, if your credit report had either 3, 4, 5 or 6 credit cards with balances your answer would have fallen in the same bucket and you would have earned the same 20 points.
This is precisely why the people who try to assign a specific value to any one credit report entry are universally incorrect. In this example, you would have earned an equal 20 points toward your score even if you had 4 different credit reports.
Your Never “Lose” Credit Score Points
Here’s another one that’s going to blow your mind. Your credit score doesn’t start out at a perfect 850 and then go down based on your credit reports. You instead start low and accumulate points.
Nothing on your credit report is worth negative points. So, collections are not worth negative 50 points. Charge offs are not worth negative 100 points. It doesn’t work that way. Your score doesn’t go down because of negative information, it just simply isn’t as high as it could be because you’ll accumulate fewer points during the scoring process.
If you have any of those negative items, like collections and charge offs, you would fall into a bucket that would be worth fewer points than you would have fallen into if you did not have those types of negative entries. That’s why people who have negative entries have lower scores, generally, than people who do not. They earn fewer points, rather than lose more points.
You can apply these examples to every scorable entry on your credit reports. This includes inquiries, the presence or lack of negative information, debt and debt-related ratios, the age of your credit report information, and the diversity of your credit report entries.
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group and the author of four books about consumer credit. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has 27+ years of experience in the consumer credit industry, has served as a credit expert witness in more than 370 lawsuits, and has been qualified to testify in both Federal and State courts on the topic of consumer credit. John serves as a guest lecturer at The University of Georgia and Emory University’s School of Law.
Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of Tradeline Supply Company, LLC.
One of the more common questions I receive from consumers is how they can best establish credit or improve their credit scores. It’s a hard question to answer without seeing their credit reports. There are many paths to poor credit scores so the advice isn’t as simple as one universal answer. The answer is going to vary based on each consumer’s individual credit situation.
As to the “how can I establish credit” question, that one is certainly easier to answer because there is a finite number of options to choose from when building or rebuilding a credit report and a credit score. My favorite option is the same one my parents used some 33 years ago when I was 18 years old and headed off to college. My father added me as an authorized user on one of his credit cards.
If you’re not familiar with authorized users, you can read more about them here. Or, I can save you some time; an authorized user is someone who is added to the credit card account of another person. The authorized user has the same spending permissions as the primary cardholder, but without any of the payment or debt liability. Almost all large credit card issuers will allow their primary credit card holders to add authorized users to their accounts.
The upside to being an authorized user is most credit card issuers will report the history of the credit card account to your three credit reports as maintained by Equifax, Experian and TransUnion. This means not only will lenders see the account on your credit reports but, also, credit scoring systems will consider it when calculating your credit scores.
Authorized Users and Credit Scoring
All commonly used credit scoring systems will consider an authorized user account or “tradeline” as a scored attribute. In English that means if you’re an authorized user on someone else’s credit card account and that account is reported or “furnished” to the three consumer credit reporting agencies, and it ends up on your credit reports, then it will be considered in the calculation of your credit score.
In most scenarios an authorized user credit card account is treated no differently than if you were the primary cardholder. The balance, the credit limit, the age of the account, and the account’s payment history would be treated no differently. If all of those credit card attributes say good things about you, the card will likely help your credit scores. And conversely, if the card is mismanaged then you too will likely suffer a credit score impact, just like the primary cardholder.
There was a time many years ago when authorized users were being abused as a credit repair strategy to temporarily boost consumer credit scores. The response…in June of 2007 the primarily used credit scoring company announced that they would no longer count authorized user accounts in their upcoming credit scoring system. The reason they gave was that by no longer counting authorized user accounts in the calculation of a credit score they would be protecting lenders from the practice of piggybacking on someone else’s credit card account.
Thankfully the company reconsidered their position after consulting with the Federal Reserve Board and the Federal Trade Commission. Instead of simply ignoring authorized user tradelines, the company instead implemented logic into their future credit scoring models that reduced the potential impact from piggybacking. [1] The specifics as to the exact treatment of authorized user tradelines by these newer credit scoring systems have never been publicly disclosed.
How Authorized User Tradelines are Helpful
Assuming an authorized user tradeline makes its way to your credit reports, it can be helpful in a variety of ways, which I alluded to above. First and foremost, lenders like to see positive information on credit reports, and that has nothing to do with your credit scores.
If the authorized user account is old, it will help to increase your average age of accounts, which is an important factor in your credit scores. If the authorized user account has a clean payment history, that is helpful to your credit scores. And, maybe most importantly, if the authorized user account has a low balance relative to the credit limit, that is very helpful to your credit scores.
Really the only way an authorized user account can hurt your credit scores is if you choose to associate yourself with a poorly managed account. For example, you’d never want to have your name added to an account that had a history of late payments. And, you’d never want to associate your name with an account that has a large balance relative to the credit limit. These are score damaging qualities of a tradeline, which would certainly point your credit scores in the wrong direction.
[1] From the Written Statement of Fair Isaac Corporation before the U.S. House of Representatives Committee on Financial Services Subcommittee on Oversight and Investigations.
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group and the author of four books about consumer credit. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has 27+ years of experience in the consumer credit industry, has served as a credit expert witness in more than 370 lawsuits, and has been qualified to testify in both Federal and State courts on the topic of consumer credit. John serves as a guest lecturer at The University of Georgia and Emory University’s School of Law.
Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of Tradeline Supply Company, LLC.
We’ve written before about the problem of 
26 million consumers in America have no credit record whatsoever. On top of that, there are an additional 19 million consumers who do have credit files, but they do not contain sufficient credit information to be scored by a widely available credit scoring model. These consumers—in total making up nearly one in five American adults—are the “
FICO, the company behind the creation of the original FICO credit score and its many subsequent iterations, has announced the latest model in their line of credit scoring algorithms: the FICO Score 10 and the FICO Score 10 T. The “T” in the latter scoring model stands for “trended,” which reflects the incorporation of trended data over time into the algorithm.
