A credit score can open up or it can shut the door on your financial future. This number, based on our successful financial habits, affects our borrowing power and also the rates we pay for car insurance, cellphone services and even cable.
The higher the number, the better the terms are that we pay for the money we borrow. If your number is lower, you can expect to pay a larger deposit when opening an account for utilities and a higher cost for car or home insurance.
However, there are a few people who don’t have a score at all. Young people just starting out and those who have never borrowed any money may find that they have a zero credit score. It seems perverse that those who have saved their money to pay cash for everything will be rewarded by higher rates on insurance and an inability to borrow when needed.
Recently, one of my kids ran up against this problem. He has saved money when he needed something and paid for everything with cash. As a result, when checking his credit score he found that he had zero for a score. He like millions of other Americans doesn’t have enough information to make a credit file.
Most people think that you start with a perfect score and bad financial decisions lower it. In fact, the opposite is true. You start with zero and work up from there with good decisions.
FICO has recently launched a new credit-scoring system that will help those with no history of borrowing to get a credit score. A major component of a credit score is to evaluate how much credit you have, how you pay your credit accounts each month and the length of your credit history. The new scoring formula also recognizes consumers’ payment history on other bills. Anyone who already has a credit score will not receive a new score based on this system. The new formula will only be applied to individuals who have too little information for a rating in the current system. This new system will help high-risk consumers access credit.
Another factor this system includes is how often you change addresses. Frequent changes of addresses are believed to be related to instability.
So when you haven’t ever borrowed any money, what can we look at to establish a pattern of how you handle your finances? This new model incorporates payment history of bills you pay each month. Most people have rent, utilities or cellphone bills. Incorporating these into the credit report allows 15 million more consumers to have a credit report.
This new scoring system give those without a credit score a number to report and opens the door for these people to access credit. However, it is still in the testing stages.
The numbers reported on this score come from a database of telecommunications and utility bills reported to Equifax. The challenge is, we don’t know how many of these companies will report the payment details. The scores will help credit companies grow their business, but there isn’t as much in it for the reporting companies.
It isn’t clear how these new scores will affect the traditional scoring systems or if they will be considered as good a gauge of credit worthiness.
This new scoring system is being tested by 12 credit card companies. So far, it has not been accepted for higher risk loans like car loans or mortgages. Keep watching for new developments with this alternative credit score.
Roxie Rodgers Dinstel is associate director of the Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at firstname.lastname@example.org or by calling (907)474-7201