With that said, there is still a sizable opportunity
for the financial industry to expand access to consumer
credit. This is an important issue as access to affordable
credit products helps consumers’ ability to build wealth.
There are approximately 50 million consumers that don’t
receive a score today, many of whom would be considered good credit risks by lenders. These consumers do
not receive a score for one of two reasons. The first is
that there are 25 million consumers who have not used
any form of traditional credit, and as a result, have no
record at the CRAs and are often referred to as “credit
invisible.” The remaining consumer population does have
some information at the CRAs but have insufficient information to generate a reliable credit score. In conducting
research (see graphic below), FICO found that these 28
million unscorable consumers that have existing credit
bureau files profile very differently, as outlined below:
• Credit Retired. Consumers with no recent trade
line updates in 4. 5 years, on average. This group
has a median age of 71 and most have voluntarily
stopped using credit accounts. Their appetite for new
credit is very low; fewer than 5% of this population
recently applied for credit.
• Lost Access to Credit. Consumers with no recently
active/updated trade lines, and with historical signs
of serious delinquency or other negative behavior in
their credit file (e.g., collections and public records).
This segment consists of approximately 18 million of
the 28 million unscorable consumers who have credit
files at the three largest CRAs. These consumers have
in many cases experienced a negative event and subsequently lost access to credit. As such, their traditional
credit files are “frozen” at their moment of financial
distress. Scoring these consumers solely based on this
‘frozen’ data will result in many of them receiving low
scores with no opportunity to positively impact their
credit standing in a favorable way.
• New to Credit. Consumers with 1+ recently active/
updated trade lines but with less than 6 months of
credit history. These consumers have a median age of
24 and typically have recently opened their first credit
card with a low (< $1,000) credit limit. As these consumers maintain the credit account, they will receive a
FICO Score after 6 months history.
In light of the above findings, FICO chose to turn to
data sets outside of the three CRAs to develop a new
alternative data scoring model, FICO® Score XD. This
score is designed to identify creditworthy consumers in the
traditionally unscorable population and its intended use is
for unsecured lending.
“Alternative data” is a term that is widely used but frequently misunderstood. At FICO, we define alternative data
as information that cannot be found in the files maintained
by the three major credit reporting agencies. FICO®
