If a limited credit history or a blip on your credit report have been keeping you from borrowing money, a new development for 2019 may change your luck.
Fair Isaac Corp., which you likely know as FICO, is introducing a new method for scoring credit — the UltraFICO — that could improve your credit score and give you a better chance of getting that loan you've been after. How? UltraFICO considers not just your borrowing history but also your bank transaction history.
What is the UltraFICO score?
Let's start with a little background.
FICO credit scores
The FICO-scoring system is the primary basis for consumer lending decisions in the United States. Lenders and collections agencies provide information to credit reporting agencies like Equifax and TransUnion, who then use that information to create a FICO credit score for each individual.
Until now, those credit scores have been based entirely on a person's borrowing history.
See: How to Get Your FICO Credit Score for Free
Getting a low credit score under FICO
So if, for instance, you've avoided credit cards and have never financed a vehicle, you might have a low credit score — not because you've had difficulty paying your bills but because you simply haven't had very many of them.
If you actually have had difficulty paying your bills, then you may also have a low credit score. Say you went through a rough patch five years ago but have since paid all your bills and actually built up an emergency fund and a nice nest egg. It doesn't seem fair that you can't get a mortgage loan now because of some trouble you had half a decade ago, does it?
Well, the UltraFICO is FICO's response to lenders' requests to find other methods — besides a straight credit score — of analyzing the risk level of a particular borrower so that more people can receive loans.
See: The Best Ways to Build Credit
How does UltraFICO work?
UltraFICO considers not just your borrowing history but also your bank transaction history.
If you walk into a lender's office, your traditional credit score will still be the first thing they pull. But if that number isn't high enough for the lender to approve a loan, the UltraFICO score could be their next step.
The lender can choose to recalculate your score using the UltraFICO system to include your bank activity in addition to your borrowing history. FICO says that borrowers who have at least $400 in their bank account and who haven't overdrawn in the last three months will likely see an increase in their credit score — perhaps by as much as 20 points.
What does the new UltraFICO mean for you?
If you already have stellar credit, then the FICO change isn't going to make much of a difference. Keep up the good work — you'll still wow a lender when they pull your credit report.
See: If Your Credit Score is Over 700, There's Something Your Student Lender Doesn't Want You to Know
But if you have a thin or imperfect borrowing history, you'll gain a bit more control over your borrowing options in 2019.
By engaging in financially responsible banking activity — maintaining a positive balance in your bank account and making frequent transactions — you may be able to increase your credit score without going back in time and changing history. That's a big win for a lot of potential borrowers who have good financial habits that aren't necessarily reflected on their current credit score.
One way to make sure that you keep your bank account flush with cash is to reduce your monthly student loan payments. And a great way to do that is to refinance your student loans. The average borrower who refinances is able to lower their monthly payment by about $250 a month.