Published on 5/08/2024

Alternative data: Has the FICO score gone the way of the Dodo?

Let’s face it, credit scores when you are trying to obtain a loan can be as frustrating as ants at a picnic. They can feel arbitrary, mysterious, and sometimes downright unfair. Enter alternative data, the challenger in the ring, ready to throw a knockout punch to the traditional FICO score’s reign. 

But before we declare the FICO dodo-bound (RIP, poor flightless bird), let’s delve into the world of alternative data and see if it truly spells the end of an era.

Fun Fact: Did you know the FICO score is named after Fair Isaac and Company, that provided the algorithm we have all been victimized by? Contrary to popular belief, it’s not some mythical credit-wielding wizard. We know, mind blown. Though somehow it would be more understandable if it were a credit-wielding wizard, wouldn’t it? 

The Not-So-Secret Life of FICO Scores

FICO scores have been the go-to for lenders for decades. They rely on credit history, which is great if you have been financially responsible since your college ramen days. But what about folks who are new to credit or have a non-traditional financial journey? FICO scores often leave them out in the cold.

The FICO Formula: A Love Letter to Ramen

FICO scores adore a long, squeaky-clean credit history. They swoon over a steady stream of on-time payments and a low credit utilization ratio. (Think: living on ramen noodles in college wasn’t a financial faux pas, it was building a stellar credit score!) 

But What About the Rest of Us?

The problem? This love story leaves many out in the cold. Millennials saddled with student loans, folks who are new to credit, or those with a non-traditional financial journey – they all get a blank stare from FICO. Their stories, their struggles, their responsible financial management using alternative methods – all ignored. Does this mean they are not credit worthy? Absolutely not! 

It’s Time to Rewrite the Narrative

The good news? The world of credit scoring is evolving, and lenders are quickly following suit. New models are emerging that consider a wider range of factors, offering a fairer assessment for everyone. Not to mention underwriting practices have started regularly encompassing bank statement data allowing for a more comprehensive approach to financial fortitude. Suddenly setting that rent and internet bill to auto pay is paying off in spades. It’s time to break free from the ramen-fueled past and embrace a future where your financial journey, in all its richness, is recognized. Don’t worry you can still eat packaged noodles; you can even upgrade to the fancy ones!

Enter Alternative Data: The Data Disco Ball

Alternative data is all about shining a light on new aspects of a borrower’s financial picture. This can include things like:

  • Banking data: Your checking and savings account activity can reveal a lot about your financial habits, keeping your account out of the red can mean a path to some green. 
  • Utility and phone bills: Paying your bills on time consistently? Not only does it keep the lights on and the beer cold, but it also tells lenders you have your financial priorities in order. 
  • Rental payments: Renters rejoice! On-time rent payments can now be factored in. Yes, this means you can, nay SHOULD be harassing that roommate for their half of the rent. It’s your economic credibility at stake. 
  • Subscription services: Do you have a consistent history of managing multiple subscriptions? This can show responsible budgeting. Finally binge watching your favorite shows has paid off! Though if you’re still using your sister’s account, you’re building her credit worthiness instead of yours. I’m sure she’s grateful though. 
Interesting Statistic: A study by the Federal Reserve Bank of Philadelphia found that using alternative data could increase loan approval rates for thin-file borrowers (those with limited credit history) by a significant amount. No, really!! You can Google it. 

So, is the FICO French toast? Not quite.

FICO scores still have their place, especially for borrowers with a long and established credit history. But alternative data offers a more complete and (dare we say) current view, giving a fairer shot to those who might not have a traditional credit footprint. 

Think of it this way: FICO is like judging a book by its antiquated, faded, and slightly ripped cover, while alternative data lets you peek inside and read a couple chapters while the store manager isn’t looking. 

The Future of Lending is Now

The future of lending currently involves a collaboration between FICO scores and alternative data. This powerful combo gives borrowers more opportunities, and lenders more ability to say “Yes”. Which makes everyone happy…except dragons. Their money management skills are quite mid-evil. This is why they must resort to threats and bribes to get a loan. 

So, the next time you feel frustrated with your FICO score, remember, there’s a whole new world of alternative data waiting to be explored. It might just be the key to unlocking the financial opportunities you deserve. 

Recent Posts