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FICO XD: A Credit Score for Those With No Credit

Credit Score, Personal Finance
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FICO Score XD, a new alternative credit score, is now being used to evaluate borrowers who have no credit history or too little credit history to generate a traditional FICO score. The XD is derived from how customers pay some utility, cable and cell phone bills.

FICO, the creator of the scores, is offering the XD to bank credit card issuers as a way to give previously unscorable consumers a shot at getting a credit card, though the company does not disclose which issuers are using the score.

As with more traditional FICO scores, paying bills on time is crucial for consumers. Information used for the XD score comes from phone carriers, utilities, credit bureaus, public records and property data. The XD shares the same 300-to-850 scale as the traditional FICO score and its less widely used competitor, the VantageScore.

The FICO XD includes data on payments for such bills as:

  • Landline phone.
  • Pay TV or cable.
  • Cell phone.
  • Utilities.

While the data may be predictive of how a consumer will repay borrowed money, they are not considered in traditional credit scores, nor do they appear on credit reports unless those consumer accounts have been sent to collections.

The temporary FICO XD is designed to give a financial footprint to the “credit invisibles,” or people who lack recent credit history, and help lenders figure out which previously unscorable consumers are creditworthy. Once people are approved for a credit card, they are on the way to being scorable under the traditional FICO.

That seems to be what happened in pilot testing, when a dozen major banks participated. Within six months of opening a credit account, the new cardholders were able to get traditional FICO scores, the company said. And they are proving to be good customers: Nearly half of those who had FICO XD scores of at least 620 went on to achieve high credit scores (700 or higher) two years after getting a credit card.

Plenty of data available

About 50 million people don’t have traditional FICO scores, which require at least one undisputed credit account that has been open and reporting to credit bureaus for at least six months.

VantageScores use alternative data — when they are included on credit reports — and can score more consumers, with scores generated in as little as three months.

Potential lenders would like to be able to figure out which of the millions of people who don’t have credit scores would be creditworthy customers.

Much of the emerging financial technology industry revolves around identifying alternate measures of credit risks. Several personal loan providers, for example, look at factors such as income potential for new graduates or the purpose for the loan. All of them, though, depend in some measure on an underlying credit score.

FICO’s partnership with Equifax and LexisNexis Risk Solutions gives it access to property data and to the National Consumer Telecom & Utility Exchange, a group managed by Equifax that collects information from phone, utility and cable records. Those accounts don’t appear as credit-related entries on the credit reports used to calculate your score, but they can be indicators of creditworthiness. The extent of data available may surprise you: whether you own a home, the home’s value, bank records, occupational licenses and how often you move.

You may have a thin credit file, but there’s likely no shortage of information about you.

Access for the ‘credit invisible’

Why would someone not have a credit score?

You can be unscorable if you’ve never had a credit card or loan, so there is insufficient data for a score. Also, if you’ve had credit but haven’t used it in years, you could become “credit invisible.”

Either way, in the eyes of the credit-scoring gods, you’re unlikely to be approved for an unsecured line of credit such as a credit card because you don’t have a track record of borrowing and repayment. Not only are you rejected for loans and credit cards if you are unscored, but you may also pay more for car insurance and find it more difficult to rent an apartment.

If you’re credit invisible — and until the FICO Score XD is widely adopted by lenders — it’s important to know how to find other on-ramps to credit, including:

  • secured credit card. Be sure to keep balances to less than 30% of your credit limit, which is typically equal to your deposit.
  • A “credit-builder loan,” which, as the name suggests, is a loan for the purpose of improving credit. These are often found at credit unions or community banks.
  • co-signed loan or credit card (small and time-limited credit that limits the risk to the co-signer).
  • Rent-reporting services that relay rent payment information to credit bureaus, creating an entry for a bill you’re already paying.

These credit products are often available even to people without a credit history. And paid on time, they can give users the history and credit scores required to get unsecured loans and credit cards.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.