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FICO Score XD promises to score the unscorable

Kelly Dilworth

If you’re one of the millions of consumers who’ve had trouble getting credit because you don’t have enough credit information to generate a traditional FICO score, you may soon have an easier time getting approved for a new card.

Credit scoring giant FICO teamed up with a dozen major credit card issuers to test an alternative credit score, dubbed the FICO Score XD, that FICO says can reliably score more than 50 percent of people who the credit scoring company previously considered “unscorable.”

To have a traditional FICO score, you need to have at least one trade line on your credit report that’s older than half a year and has had activity within the past six months. Many consumers wind up losing their FICO scores because they stopped using credit years ago or have been unable to get approved because of old mistakes. Millions more don’t have a FICO score because they recently moved to the United States or because they were previously underage and too young to qualify for a loan.

FICO says that many of these “credit invisibles” are more creditworthy than their lack of a FICO score indicates, but the only way to score them is to use nontraditional data, such as cellphone payment records, utility bills and other nontraditional metrics.

Advocates have been pushing the use of nontraditional data for years, but until recently, it wasn’t known how reliable that data would be for approving traditional loan applications, such as credit cards. Now, FICO says its internal research shows that incorporating nontraditional data is not just effective for scoring more people; it’s also a reliable metric for identifying borrowers who are worthier of credit than they seem. According to FICO, the new FICO score XD looks at landline and mobile phone payments, cable payments, property records and other public records data.

“FICO’s focus is on expanding access to credit — not simply scoring more people,” said FICO’s Jim Wehmann in a news release. “Based on the results of the pilot program, the new FICO Score XD can be a lifeline for millions of previously unscorable people.”

According to a white paper published earlier this month, FICO analyzed the creditworthiness of roughly 14 million consumers and found that more than a third of consumers with a FICO Score XD have a high enough score to qualify for a loan. Many of these consumers are so good with credit that they qualify for a traditional FICO score of 660 or higher after just two years of using credit. Nearly half of consumers who started out with a FICO Score XD of 620 or higher go on to earn a traditional FICO score of 700 or more, while 25 percent go on to earn a score of at least 740.

“This data supports the premise that an alternative data score can be an effective tool in providing unbanked consumers a safe on-ramp to mainstream credit,” wrote FICO in the report. “Consumers identified as good credit risks with this score are likely to maintain and improve their credit standing over time.”

But will lenders adopt it?
According to credit scoring expert Barry Paperno, who used to work for FICO and credit bureau Experian, the new FICO Score XD could potentially be a “game changer” for consumers who don’t have enough recent credit to qualify for a traditional score or whose traditional FICO score doesn’t accurately capture their creditworthiness.

FICO could face an uphill battle, however, in getting card issuers and other lenders to actually use it, he says. Many new credit scores tend to fail because lenders are slow to change their habits. “It’s so hard for a new score to get adopted,” says Paperno, who writes the weekly “Speaking of Credit” reader advice column for “It’s such a process. The testing phase and the validation, the pricing. A lot of decisions have to be made, so it’s kind of hard to say that a new score is going to turn things upside down.”

The FICO Score XD could be different, since it addresses a problem that lenders say they want to solve.

That problem is: Issuers are eager to expand their rolls of cardholders, but people with high credit scores are often less interested in acquiring new credit because they already have a wallet full of cards. Many without FICO scores, on the other hand, are eager for credit and may have a history of paying their bills on time, but are rejected by lenders because they don’t have a reliable score.

According to Paperno, previous iterations of the FICO score often failed because they weren’t that much different from their predecessors. For the most part, “They do the same things that existing scores do.” But the FICO Score XD is different, he says, because it’s so unlike the traditional FICO score. “This is a score that nothing else does,” says Paperno. “It meets a need that isn’t already being met.”

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