Coming soon: New ways to improve your credit score
Who qualifies and why credit experts aren't fully on board
Consumers with thin or subprime credit histories will soon be able to boost their credit scores by having their bank accounts and bill-paying records included in how the score is calculated, Consumer Reports has found.
Under the current method, your credit score is mainly determined by how well you pay back your debts, including credit card and mortgage payments. By adding more criteria to how the credit score is calculated, young people with thin credit histories and those with low credit scores—about 100 million people—could see a modest improvement.
One of the three big credit rating agencies, Experian, will soon offer what it calls Experian Boost, which will look at utility payments in determining your credit score. Another credit-scoring company, called Fair Isaac Corp's FICO, will unveil UltraFICO, which will look at your banking history. Both services, which are expected to roll out later this year, will be opt-in and free to consumers.
Two other big credit rating agencies, Equifax and TransUnion, are not involved in this effort.
Even a small bump up in your credit score could make the difference between getting a credit card or mortgage or being turned down. Right now, anyone with a score below the "good" credit range of 670 to 850 can find it hard to obtain credit, rent an apartment, and even get a job.
Consumer advocates support the new effort by the credit rating companies, but they worry about the risks. Consumers should not lose sight of the fact that they are disclosing potentially sensitive information to financial services firms, says Chi Chi Wu, a staff attorney at the National Consumer Law Center.
Josh Askew offers credit repair services in Jacksonville. He said, "You are really giving all of this data to a data company that they make money by selling your data."
Not to mention, nearly 150 million consumers already have had their personal information stolen as a result of the Equifax hack in 2017.
There's also the danger that those with less-than-stellar credit scores may be tempted to borrow too much if their scores improve and they have better access to credit.
"I would urge people to make sure they can repay their loans under all circumstances, not just the best ones," says Ted Rossman, an industry analyst at CreditCards.com.
Still, it's worth considering these options if you want to improve your credit history or don't have enough of one to qualify for a loan or credit card. For some people, the additional data could push you into a higher credit category. Here's what you need to know.
How the Services Work
You will be able to opt-in to one or both of these services. But given the differences in what they rate, check first to see whether your savings or payment history will help your credit score.
When you sign up for Boost, you give Experian read-only permission to see your bank account data— the credit bureau will then zero in on your utility, internet/cable, and telecom payments.
You can determine how many qualifying utility, internet/cable, or telecom payments you wish to add to your Experian credit file, and you can turn off the service at your discretion.
Experian's research shows that nearly 70 percent of consumers who add this payment information will see an improvement, says Greg Wright, chief product officer at Experian Consumer Information Services.
Askew is not so sure. He added, "If you have a good history of paying your utilities and cell phone, then you're a great candidate. However, most who struggle with credit don't have utilities in their name. It's usually in a family member's."
The real-world impact of a higher score is likely to be modest, especially if you're already in good financial shape. Still, 5 percent to 15 percent of borrowers will move into a better score category, Experian predicts, which could be significant if you climb from subprime to prime. When Wright, who has an excellent credit rating, tested the service on himself by adding five bill payment histories, his score rose 11 points.
Experian Boost is expected to roll out nationally in the first half of this year, 2019, Wright says. Consumers can register for early access at this site.
Though this service also looks at your bank account to create a score, UltraFICO's focus is on how well you manage your money, such as maintaining a certain amount in savings and avoiding bounced checks. Those who do bounce checks could be at risk for lower scores.
The goal is to reach out to younger consumers or immigrants, who may not be traditional banking customers now, says David Shellenberger, vice president of product management scores at FICO. The company believes UltraFICO will score 10 to 15 million consumers, or about 20 percent to 30 percent of the 53 million consumers previously considered unscorable due to lack of credit history.
To get a positive rating from UltraFICO, you might need a savings cushion of about $400 and positive balances during the previous three-month period, although these aren't hard and fast cutoffs, Shellenberger says. The company says about 70 percent of consumers who maintain these financial goals will benefit from higher credit scores.
Consumers who want to receive an alert when UltraFICO rolls out later this year can sign up here.
Why You May Want to Think Twice
Credit experts say the efforts to provide more consumers access to credit are a positive development. But some express concern that marginal borrowers may borrow too much. So before applying for more credit or a loan, make sure your cash flow can easily support those repayments.
Consumer advocates favor the opt-in nature of the services, which is a change from the usual credit agency practice of collecting data without consumer permission. But they are concerned about the consequences of disclosing more personal information.
"The data may be used in ways that aren't expected, such as credit card companies lenders tracking shopping behavior, such as casino visits, through your debit card transactions to determine credit worthiness," Wu says.
Askew also points out that if you live in Florida and you are a first responder, you might find that you can't opt in for Experian Boost. Many first responders don't have utility accounts with their name and address, because those are public records. They are simply known as a number, it's for their protection. To cash in on Experian Boost, they would have to change that
Consider Other Options
Don't overlook the tried-and-true methods of building credit, starting with the basics: pay down debt, pay bills on time, and keep card balances low. You can also try secured credit cards and credit-builder loans, which allow consumers to show lenders they can handle debt responsibly.
Secured credit cards require a deposit that's typically equal to the card's credit limit, which gives lenders assurance they will recoup their funds if you stop paying. They usually have credit limits of a few hundred dollars, which can be limiting if a consumer needs to buy a big-ticket item like an airline ticket. Check with your own bank to see whether one can be set up.
Credit-builder loans are offered by credit unions. You will need to prove you have enough income to make their payments. A typical arrangement would require you to place the money you borrow in a credit union savings account. On-time payments are reported to the credit bureaus, rebuilding your credit history. At the end of the loan, the consumer receives the loan proceeds. (Be sure to ask the lender whether it reports the account, which is necessary for building a credit history.)
No matter what path a consumer chooses, it can take months to see a significant change in a damaged credit score.
"Pay your bills on time, keep your debt modest, and your score will go up and up," says John Ulzheimer of The Ulzheimer Group, a credit expert who previously worked at Equifax and FICO. "Then you won't have to worry about these alternative methods."
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