New credit scoring for consumers
(Updated Sunday, August 15, 2004, 6:00 AM)
Kathy Kristof / Los Angeles Times

About 50 million Americans don't have enough credit to get credit, but that may change as a result of a scoring system recently launched by Fair Isaac Corp., a Minneapolis-based developer of consumer credit scores. Fair Isaac has developed an "extended" score that will pull information about people from nontraditional sources, such as payday lenders, rent-to-own furniture retailers and deposit accounts.

The idea is to flesh out credit files on recent immigrants, divorcees, students, widows and other people who may lack enough of a traditional credit history to support a standard credit score -- the basis on which most lending decisions are made.

"Between 5% and 15% of all loan applications are just dropped on the floor because there is no score available for that person," said Craig Dillon, vice president of global scoring solutions at Fair Isaac. "We believe we will be able to provide scores for about half of that population."

Consumer advocates and credit experts had mixed reactions to the news, saying that it was too soon to know whether the expanded scoring model, announced last month, would be a boon or a bust to the credit-deprived.

"The question is whether this new score will give you access to fair loans that have reasonable terms, or is it going to put a bulls-eye on your back that tells every sleazy company out there that these are people you can target for high-cost, abusive loans?" said Travis Plunkett, legislative director for the Consumer Federation of America in Washington.

Joel Greenberg, president of credit counseling service Novadebt in New Jersey, also called the new scoring model a mixed bag. "It is possible that this will provide lower interest rates to a segment of the population whose only option now is maybe to get a payday loan, which is as predatory a loan as you can get," he said. "But there are enormous pitfalls."

Credit scores have become pivotal in recent years because the lending process has become increasingly automated. Where bankers of yesteryear would sit down with a borrower and try to assess their ability to repay a loan based on their assets, today's borrowers frequently apply for loans over the phone or via the Internet.

The determination of a borrower's propensity to repay a loan is left to computerized models that spit out a so-called FICO score ranging from 300 to 900. The higher the score, the lower the default risk, according to Fair Isaac. From the consumer's standpoint, the higher the score, the easier it is to get credit and the better the loan terms.

However, to get a score at all, people need to have some recent payment history, usually with traditional lenders such as banks or credit card companies.

Having a thin or nonexistent file doesn't mean that a person has no bills or payment history. It simply means that they have little history with the types of companies that report to credit bureaus. A vast array of payments -- including rent, utility bills, medical bills and payments for goods bought on layaway plans -- aren't recorded in a traditional credit file. "In credit, past performance is the best indication of future behavior," Dillon said. "That's why this product is so important."

Kathy Kristof can be reached c/o Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Her e-mail address is kathy.kristof@latimes.com