Our credit scores have always left a bit to be desired, they don’t take into account some of the ways that we can prove our worthiness as a credit risk such as rent and payment of utilities. The “Credit Score Competition Act of 2015” seeks to change that and recently received support from the National Association of Realtors. The bill would require Fannie Mae and Freddie Mac (the government sponsored mortgage backers) to “establish procedures for considering certain credit scores in making a determination whether to purchase a residential mortgage, and for other purposes.”
The sponsors of the bill, Rep. Ed Royce, R-CA., and Rep. Terri Sewell, D-AL., believe that many Americans who might be qualified to buy a home are unable to do so because of their FICO score. The credit score is often dependent on use of credit cards to help build credit history. According to Housing Wire, alternative credit scoring models could include additional predictive metrics and payment history measuring offering relief for borrowers with medical debt and large debt that has been paid off.
For lenders the challenge is always to balance risk and reward. Fannie Mae and Freddie Mac need to loan but also need to keep their ratio of defaults low and avoid another subprime meltdown at all costs. Use of alternative credit scoring by these government-sponsored enterprises could entice other lending institutions to adopt them as well.
The ways we demonstrate our financial viability are always changing. In today’s fluid world where more and more people are members of the gig economy, more mobile, and may not have a car or other large assets, alternative credit scoring, if done responsibly could help tell a more complete picture of a person’s viability as a borrower. With all the big data available at our fingertips it’s less a question of having the information and more a question of finding the best ways to quantify it appropriately.