As the independent standard in credit scoring, FICO® Scores are the leading credit scores used extensively across the lending ecosystem. 2022 marked the first year in over a decade the average FICO Score did not increase, while the industry’s attention remained on topics such as alternative data and
BNPL. Here are the five most-viewed posts from 2022 on the FICO Blog related to FICO Scores.
1. FICO Fact: How Alternative Data Enhances the Accuracy of Consumer Credit Profiles
Joanne Gaskin discussed that when we talk about alternative data, we focus on how it can help bring millions more people into the mainstream credit ecosystem. An important benefit of finding new broad-based data sources and incorporating them into widely-used credit scoring models is the ability to provide greater visibility into the overall profile of an applicant population.
FICO® Score XD 2 allows for exactly that. Developed by FICO in partnership with LexisNexis Risk Solutions and Equifax, this innovative credit score utilizes alternative data—data not included in the traditional credit bureau file. The inclusion of this alternative data leads to a more reliable estimate of consumer credit risk and helps score more than 26.5 million previously “unscorable” consumer files.
In addition to bringing new consumers into the system, alternative data also provides more clarity on credit files for consumers who are “credit retired,” meaning they have not used credit in at least six months, and consumers who only have negative information in their file. There are many reasons why a consumer may be inactive and gaining this insight can be challenging. FICO® Score XD 2 solves this problem by incorporating public records and property data from LexisNexis Risk Solutions, supplementing credit file data with this public registry information.
2. BNPL in Credit Reports: How Could This Data Impact FICO Scores?
Ethan Dornhelm dove into a hot topic of Buy Now, Pay Later (BNPL) plans, which allow shoppers to make purchases and pay for them in installments over a defined period. According to the research from Cornerstone Advisors, these point-of-sale short-term installment loans with low credit amounts have been increasing in popularity during recent years for retail purchases like clothing, household goods, electronics, and more. BNPL loans are cited as a potential driver of greater financial inclusion, both in terms of consumer access to the BNPL loan themselves, as well as access to credit products that could enable unbanked and underbanked consumers to establish (or re-establish) their credit histories with one or more of the Consumer Reporting Agencies (CRAs).
As BNPL loans become a more commonplace form of credit used by consumers, these loans could also become an important factor in consumer credit reports, and by extension, in the FICO® Scores based on those credit reports. While the BNPL product offers consumers some attractive features, it is essential that both lenders and consumers alike understand the potential impact these BNPL loans could have on consumers’ credit scores. All FICO Score versions can consider BNPL data, provided that the information is reported and made available to be incorporated into the algorithm.