The Crumbling Credit Score

Written by Di Princell

December 8, 2021

You say you want a revolution, Well, you know, We all want to change the world. ~ John Lennon

Without question, the most important number in a U.S. citizen’s life, one that controls home and car ownership, the size of your TV screen, loan acceptance, interest rates, and often, the type of employment is the legendary credit score. The FICO score created in 1956 by William Fair and Earl Issac and COmpany, became the industry standard in 1989 to determine a consumer’s credit worthiness according to: payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries. The score is omnipotent!

The initial goal of the credit score was to take the disparate measurement system out of the hands of sketchy lenders and banks by standardizing the way consumers were being evaluated, focusing on fairness and objectivity. Unfortunately, as the impact of the score grew, it became apparent that racial and minority biases were consequences of the algorithms used. The skewed score has been endorsed by the business world for decades without any challenges to its partiality and inaccuracies.

Fast forward to 2022, with the explosion of consumer information and alternative financial data, offering data scientists the competencies to examine thousands of attributes about a person’s ability-to-pay. Combining a credit score with an in-depth analysis of a consumer’s bank transactional history encourages more loans to underserved consumers who have been historically ignored or have paid outrageous interest rates. Plus, the insightful process allows lenders to make smarter, more equitable loan choices while reducing the repayment risks, a win-win for lenders and their customers.

RIBBIT.ai, a data analytics company, leads the Fintech movement providing thousands of measurable attributes from a bank account reflecting a consumer’s ability to purchase and pay for products/services. RIBBIT’s non-traditional scoring system harnesses the predictive power of open banking and payment data, delivering smarter and more equitable lending decisions. Their high-powered team of data scientists are revolutionizing the lending space while complementing the credit score.

Covid, Buy-Now-Pay-Later (BNPL), and the Credit Blind millennials/younger generations have definitely messed with the predictability of the FICO score. As a result of Covid, the government offered consumer debt relief through forbearance and aid programs which will eventually end and frankly, who knows what will happen to credit. BNPL is evolving, possibly resulting in an explosion of consumer debt, doesn’t even report to the bureaus. The majority of millennials/younger generations do NOT use credit cards, preferring to transact out of their bank accounts.

Data analytics company, RIBBIT examines the behavior around financial transactions that reflects the way consumers manage their bank accounts resulting in a current, correct, and credible picture of their financial footprint. Carefully curated transactional bank data can more accurately predict what loan amount a consumer can tolerate and remain financially stable. Understanding a person’s banking history combined with affordability recommendations not only helps more people gain access to credit, but it also lifts consumers up from financial despair.

It’s time for the ol’ Credit Score to acknowledge its limitations and join forces with a revolutionary bank data product. As the Beatles sing, “You tell me that it’s evolution, Well, you know, We all want to change the world.”

 

Stay tuned . . .

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