WASHINGTON, Aug. 6 (UPI) -- The famous FICO score that can make or break one's credit record has been revamped to target nontraditional U.S. borrowers who've had nary a brush with credit -- but does this pose a threat to these virgins of finance?
This week, Minneapolis-based Fair Isaac Corp., which compiles the scores, announced that it is now offering a version of the score for those who don't have any credit history on file from credit cards, student loans and other types of borrowing that credit reports typically show. The expanded score system widens the classic 300-850 scoring range to 150-950.
"Use of FICO risk scores for these consumers -- such as recent immigrants, people with low incomes, recent widows and divorcees, and young adults -- will help businesses expand their markets, reduce losses, and make more financial services available to more people," a Fair Isaac press release said.
But Joel Greenberg, president and executive director of Freehold, N.J.-based credit-counseling agency Novadebt, said that these customers, who have no experience with complicated credit agreements and may not be able to decipher the financial jargon, desperately need credit education to keep from digging themselves into a debt hole.
There are both opportunities and pitfalls to providing these individuals with a credit history, Greenberg said. "Their opportunities (for credit) are very few and far between -- they're primarily forced to use payday loans and rent-to-own (stores) and are charged exorbitant fees for nominal financial assistance -- so it can work to lower the interest rates for these individuals by giving them a score."
A typical payday loan could charge three dollars', or 3 percent, interest for a $100 loan. "If this loan is made on a weekly basis -- and usually these individuals do this week after week after week -- that's 3 percent a week and that relates to 150 percent a year," he said.
Additionally, "Most people don't take a look at the fine print, and even if they do it's pretty difficult to understand everything that's being said and how it affects you," Greenberg said.
Credit counseling can provide the advice and guidance such individuals need, he said. In fact, some states are starting to require payday loan firms to provide some kind of credit education information to those taking out high-interest payday loans, he added.
The underserved segment of credit-eligible adults makes up about 25 percent of those eligible for credit in the United States, or 50 million people.
If only 3 percent of this segment took out mainstream credit, that would translate into about $300 million in revenue from new credit cards and $3 billion in new mortgages.
Craig Watts, spokesperson for Fair Isaac, said that the new scoring would help this segment, which often gets saddled with the highest credit rates, receive much better rates.
"What it does is give creditors a more objective and speedier tool regarding those looking for their first credit relationship," Watts said.
"People pay rent, they pay catalog companies when they order something, they pay back payday loans -- there are various ways people show financial responsibility and what we're trying to do is use that information to reflect credit risk," Watts said.
When asked whether the expanded scores will be just as effective as getting borrowers a good rate on a loan as a classic score, Watts said yes.
The numbers in both cases are aligned, so a score of 700 means the same thing no matter which formula produced that score, he said.
Watts said that the expanded scoring isn't currently being sold to lenders, but rather is available to lenders after they are approached by borrowers who want credit but don't have a regular FICO score -- so those in the underserved credit segment won't be bombarded with unsolicited credit card offers any time soon.
To avoid credit pitfalls, Greenberg suggested some guidelines for first-time credit users.
Borrowers should pay close attention to the annual percentage rate, or the interest rate, as well as what fees the creditor charges and when the creditor charges them. For example, credit-card fees can include annual fees, late fees, balance-transfer fees and over-the-limit fees.
Greenberg said Sen. Chris Dodd, D-Conn., is submitting a bill which, if passed, would not allow credit-card issuers to charge a cardholder over-the-limit fees if the card issuer approves the purchase at the time of sale. Right now, some creditors will allow borrowers to go over their limit and then slap them with a fee.
Some card offers will let new cardholders make charges interest-free for a period, but then will charge other fees, Greenberg said.
Many banks also include a clause in their agreements which allows them to change cardholders' interest rates for a variety of reasons, including being late or over the limit, or taking out another line of credit.
While Greenberg advocates credit counseling, he acknowledged that unfortunately, there are some disreputable credit-counseling agencies out there.
"If all they're interested in is finding out how much money you owe and telling you how much money you can save with their debt management plan, then you've gone to the wrong agency," Greenberg said.
"A third of the population that comes to consumer-credit counseling can be helped through a debt-management program, but the other two-thirds probably won't be helped at all and might even be hurt. You need to go to an organization that is more interested in you, your situation, what got you into the problem, what your budget is and what you spend money on," Greenberg said. The process should take at least 30 minutes, he said.
Some ways to find a reputable credit counselor include checking with the Better Business Bureau, or the secretary of state's office. Also, some industry associations such as the Association of the Independent Consumer Credit Counseling Agencies (AICCCA), require credit-counseling agencies to uphold certain standards. For example, the AICCCA mandates that agencies treat all clients fairly, and also requires credit counselors to ask for "reasonable" fees or contributions of no more than $75 to set up a debt management program; and no more than $50 a month to help clients maintain a debt-management plan.
While the scores are available now, it's likely to be months before lenders adopt the new scores in appreciable volumes, Watts said.
"Banks are very conservative critters -- they want to do their own evaluations before they spend hundreds of thousands or millions of dollars to penetrate this market."
