Long gone are the days when banks and credit card companies look only at your income and FICO score when issuing a credit card. Many credit card companies no longer think of FICO scores as sufficient. Some are even devising new and more comprehensible methods to determine the credibility of a customer. Earlier, credit card companies relied heavily on FICO scores to determine whether or not they should issue a credit card to a customer. However since the time of the Great Depression (recession), this train of thought is slowly changing. Companies take into account a lot of unconventional factors like the combined valuation of any real estate owned, or any criminal records in the name of the customer. Even frequency of change of addresses and type of professional license held is being considered.
Why is traditional credit score used?
Traditional credit scores like FICO and VantageScore gives lenders a score that is based on past credit history. Credit history is an important factor that can help in decision making. Earlier, credit card companies used to give away credit cards to any and everyone. This led to huge losses in the form of unpaid debts. This is the single most important factor that led to the development of traditional credit scores. A person with bad credit history was denied a credit card. This way credit card companies minimized the risk of unpaid debts.
Why traditional credit score is losing its value?
One important factor behind this situation is the stiffness or rigidity that comes with the traditional credit score methods. As a consequence, the number of credit cards being issued was on the decline. Credit Card companies want to minimize risk and not the number of credit cards that they give away. Many believe that combining traditional methods with unconventional information can reduce this stiffness. The general belief behind this theory is that a single statistical formula can be too ruthless to a customer. Instead mixing it up with some investigation of the customer on a personal level could be fruitful.
During the recession, a lot of customers scored low on their credit scores. However, such customers are normally underestimated due to their scores. Most of them can or do have the potential to handle their credits better. Therefore, traditional credit score models are no longer sufficient for everyone. Other factors that can improve credit scores of such potential customers needed to be established. Many have sold their houses, cars and have changed their jobs to improve their financial condition after the Great Depression. However, their credit history cannot be changed. Hence, their FICO scores remain as they were. Thus, new rules are being mixed with conventional credit scores to improve the overall scores of these people.
According to experts, the death of traditional credit scores is near. Lenders have already begun experimenting with non-traditional methods.
How to calculate you Non-conventional credit score?
Getting traditional credit scores be it FICO or VantageScores is easy. A copy of every one of your credit report is available for free on AnnualCreditReport.Com. However, getting your non-conventional speciality reports is a little more difficult than just logging onto a website. You have to approach the companies directly. You need to find out which companies are gathering your financial information. In order to do this, look out for the Consumer Financial Protection Bureau’s list of 42 companies that collect consumer financial data. The list will give your necessary contact information of each company. Visit their website to know how to order your annual file disclosure for free. In most cases, the reports are available online. In other cases, you will have to call a number or mail them with a request for disclosure.
Criticism of Non-conventional methods
These methods of calculating credit scores have suffered criticisms as well. Not everyone agrees with this method of renewing business with lost customers. These people are not yet ready to move out of the conventional ways. Some say that the data provided by the three big credit bureaus, namely, Experian, Trans Union and Equifax is the most dependable. Other methods of collecting data can often be inaccurate and inconsistent. Thus trusting them completely could turn out to be another big failure. Some even believe that certain data cannot describe intricate situations and may turn out to be harmful to the potential customer. This is especially true in the case of non-conventional data like rent payment. The reason is simple. Most landlords don’t report rent payments. Moreover, sometimes tenants legally withhold rents to solve a dispute with the landlord. In such cases, credit history may be harmed. Reports claim that data is also often derived from social media.
An important question in this regard can be the trustworthiness of the companies that gather these data. Many of these companies are not even listed. Therefore, their data cannot be trusted.
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