Financial marketing, like all marketing, is subject to industry trends. However, it is typically the economic indicators such as interest rates, the stock market and the housing market etc. that influence decisions on what products are marketed, the target audience and the timing. But, there was recently a big change that will be implemented in 2019 that could really shake things up in financial services and have an impact on marketers and consumers alike.
A new credit scoring system will be rolled out this year. FICO, the widely used company that analyzes and records credit scores, will launch its new UltraFICO system in 2019. Why does this matter? FICO scores are used in more than 90 percent of lending decisions and have a direct impact on our daily life. Credit reporting and credit scoring determines whether or not we can qualify for a credit card, a mortgage or car loan. And, it affects the interest rate we are going to pay if we do get the loan. The new UltraFICO scoring system may make millions of customers eligible for loans who were previously denied. Plus, some consumers may even pay a lower rate.
To understand the implications of this change, it is beneficial to understand the basic differences of the two scoring systems:
A FICO score is a number used by banks, credit card issuers and other lenders that predicts how worthy you are as a borrower. It is a compiled score based on your payment history, the amount of debt you owe, the length of your credit history, new credit that was used recently and your overall credit mix. Some of these components are weighted more heavily than others. A FICO score can range from 300 – 850. The higher your score, the better your credit. A good score is usually considered to be over 700.
The New UltraFICO score may be used when you are rejected for credit using the criteria above. It is an opt-in model whereby you grant creditors permission to check your savings, checking and/or money market accounts. The additional data is intended to provide a more in-depth picture of how you use your money. The information works in conjunction with the typical FICO credit components.
The new UltraFICO model will help consumers who have a weak and/or limited credit history. For example, younger people who have not yet established a credit history and people who have had debt problems in the past, but who have money in the bank.
Implications for Borrowers
Expert opinions differ as to how many people may be affected by the new scoring model. Numbers indicate that the score could improve a consumer’s credit score by 20 points and 7 million people who can’t get a loan today should be able to get one under this new method.
Since creditors charge a higher interest rate to those consumers who are considered to be a higher risk, this means that some people may now qualify for a lower interest rate, which can represent significant savings on larger loan amounts.
Implications for Lenders and Marketers
It is estimated that 79 million Americans have a subprime credit score (680 or below) and 53 million people don’t have enough information to generate a FICO score. If the new UltraFICO score does improve the score of many Americans, this provides a much larger population of potential customers for banks and other creditors to lend to. And, with a larger universe of people to market to, comes the need for additional marketing services – new marketing tools and messaging, new segmentation, additional analytics and the list goes on.
Having worked several years in financial services marketing on both the client side as a marketer and product manager and on the marketing agency side as an account director, I find this exciting and look forward to seeing the impact the new credit scoring model will make in 2019.