Apr 26th, 2008
Hello all, this is a guest post by Jonathon at Master Your Card. Thanks so much Jonathon especially on short notice. Where am I? Sick as a dog. Where is Jesse? Details monday.
As the effects of the mortgage meltdown ripple through the entire lending
community, the result is higher interest rates and stricter guidelines on
who qualifies for credit. In the wake of what could be termed as one of
the most devastating credit meltdowns in the history of the United States,
many empty-handed investors are searching for someone to pin the blame on.
And it seems that they’ve fixed their sights upon the lofty, mysterious
citadel of Fair Isaac Credit Organization.
Mortgage Lenders are crying foul play on Fair Isaac, citing major flaws in
the company’s popular FICO Classic credit scoring model as being the
underlying cause for the economic disaster that has taken the United
States by storm. What do these allegations mean for the credit industry?
Let’s take a look at a relatively new phenomenon in the world of credit
scores: the so called “emerging credit” scoring models.
Emerging Credit scores are largely the result of a shrinking market in
terms of the number of consumers who are considered creditworthy. As the
mortgage crises escalates, people who used to be considered an acceptable
risk to creditors are no longer eligible for even the most basic of credit
cards; but these companies still need to make money somehow, so where do
they turn to market their credit products if the old crowd just isn’t
going to “make the cut” anymore? The answer is found in the large clumps
of consumers referred to as the “unbanked”.
Unbanked consumers are those individuals who have little or no credit
history, either by deliberately avoiding all forms of credit, or simply
because they haven’t yet had the opportunity to establish credit for
themselves. Either way, extending substantial amounts of credit to the
unbanked has long been considered taboo by lending organizations, as the
FICO Classic scoring model relied on so heavily in credit industries
flagged such individuals as being unacceptable risks for investors. Now,
however, companies such as Pay Rent, Build Credit, are bridging the gap
between the unbanked and prime lending candidates.
For a long period of time, banks and other companies had little use for
organizations such as PRBC. Now, however, in an eager, if not altogether
desperate, search for qualified prospects, lenders are turning to
information brokers such as LexisNexis, PRBC, and credit bureau TransUnion
to dig up all the information they can find on an individual’s “unbanked”
payment history, such as cell phone bills, rent deposits, tuition,
magazine subscriptions, and so forth. Some agencies have gone ahead and
begun to utilize this information in new credit scoring models, dubbed as
“emerging credit scores”.
In all likelihood, it looks as if these new emerging credit scoring
systems will become mainstream in a few years. This would have a dramatic
impact on what credit card options are available to the average consumer,
since creditors will have a more complete picture of that person’s
What does this mean for you and me?
It simply means that more prudence needs to be exercised with
traditionally unreported expenditures, particularly those expenditures
which occur on a regular and continual basis, such as subscriptions or
rent payments. As always, the new systems invariably favor those who are
financially responsible and live well within their means.