FICO credit scores have been traditionally responsible for dictating the bulk of our financial capabilities, indicating what loans we can secure (and for what rates), and even influencing things like our apartment rentals and job opportunities. However, financial scoring calculations date back to the 1950s, and our modern system of credit can be traced back to the Fair Credit Reporting Act in 1970.
How many other equations and calculations do you rely on that are nearly 50 years old?
Credit score calculations have changed iteratively, and have incorporated new technologies, to some degree. For example, it’s now possible to take a short digital quiz and informally estimate your FICO credit score without the need for a hard inquiry. However, we may be overdue for a full technological overhaul.
New perspectives on the lending process (and personal finances) have led to some interesting changes in how credit scores are calculated. For example, according to the Journal Sentinel, there have been recent changes to how your standing debt and credit limits are calculated into your score.
Previously, your debt was seen as a percentage of your total credit limit only. Now, your total debt limit may be taken into consideration; for example, those with excessively high credit limits (even if they’re not using them) could be faced with a slightly lower score. Additionally, some civil judgments, tax liens, and medical debts have been removed as influencing factors.
However, these small changes don’t fundamentally overhaul the factors responsible for determining your overall FICO score, and certainly won’t propel someone into a new judgment bracket.
Big Data and Nontraditional Factors
The major changes to come will likely arise as a result of the incorporation of big data. Financial institutions have access to more personal data than ever before, and can use complex algorithms to consider those factors collectively as part of an overall risk assessment. Essentially, this would open the door to financial institutions using a much more diverse array of data points—from nontraditional areas—to help determine a person’s ability to pay a loan back.
As Fox News points out, it’s unlikely that these nontraditional factors would be used to completely overwrite the traditional credit score system we’ve grown accustomed to. Instead, these alternative data points would be used as supplementary information. For example, if a person with a low credit score attempts to secure a mortgage, the lender could fall back on these data points, such as work performance, income potential, or education, to determine the feasibility for them to pay back the loan reliably.
Technology is also making it possible for consumers to readily calculate their credit scores on the fly, leading to a higher collective understanding of the importance of credit, and faster reactions to credit blemishes. Instead of waiting days for a report to be manually generated and sent, users can estimate their credit scores instantly, and see how their most recent activity could have affected their credit scores.
According to Directing Attorney John Heath at Lexington Law, “Just knowing what your credit score is and how it’s calculated gives you an important advantage in securing your financial future.” Getting access to this information faster, and in an immediately understandable way, is already helping us improve our collective financial standing.
It’s unlikely that FICO credit scores will become obsolete anytime soon, but they are going to continue to evolve. They’ll be easier to access and easier to understand as new technology gives us more insights into our credit history, and more importantly, financial institutions will start looking beyond those traditional credit scores when determining whether to lend. This expansion will make credit available to a wider portion of the population, and can help more people build the financial foundation they need to be successful.