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Fair Isaac Corporation, whose eponymous FICO scores form the bedrock of consumer lending, is changing the way it calculates people’s credit scores.
One aspect of the update that caught my eye was how the pervasive rating system plans to treat personal loans, a burgeoning business for banks and borrowers. This is the first time FICO will break out the loan type as a separate category, distinct from auto, mortgage, or student loans.
In the new system, people who take out personal loans will be eyed with a bit of suspicion. Previously, consumers could take out a personal loan, consolidate their debt from outstanding credit card balances, and immediately be rewarded with a credit score bump. That will no longer be the case when the new rules roll out, expected in August or September.
So long quick hit highs. FICO is gaining greater visibility into people’s personal finances; the result will smooth out bumps. Instead of seeing only a static picture of how much credit a consumer is using at a given point in time—a situation that overemphasized sudden big changes, like the debt consolidation tactic described above, or the appearance of large expenses related to a big trip—the company will be able to tell whether people’s overall debt levels are trending up or down over a rolling two-year period. In other words, if a borrower is just shifting debt around without actually paying down the total, that person is going to get dinged harder.
I asked Joanne Gaskin, VP of Scores and Analytics at FICO, whether it would be accurate to say that banks and financial tech startups, or “fintechs,” had been gaming the system—exploiting a loophole—to juice consumers’ scores. “Potentially,” she said.
“From our understanding of the new program, this model could end up hurting the consumer’s credit score,” says Dana Marineau, VP and financial advocate at Credit Karma, which uses VantageScore, a FICO competitor, as the foundation for its free credit score checkups.
Paul Gu, a cofounder of Upstart, a fintech startup that helps banks make lending risk decisions with machine learning technology, says he sees the logic in FICO making these changes. He acknowledges that, on average, people getting personal loans tend to be at a higher risk of defaulting than people who opt for more traditional loans. But, he says, “whenever you paint a whole population with a broad average you may unnecessarily penalize a lot of people.”
“Short term credit hacks like debt consolidation will be much less effective,” says Jason Brown, CEO of Tally, a fintech startup that automates debt repayments. But the new scoring system “stands to benefit consumers who make consistent, steady progress in reducing their credit card debt over time,” he says.
I asked Anu Shultes, CEO of LendUp, whether she expects prospective customers to reconsider taking out personal loans from startups such as hers, given the elimination of that short-term credit score boost. She described the point as “a moot one.” “LendUp’s customers are already shut out of mainstream financial services products,” she says. If people are going to have a harder time getting traditional loans, they’ll have little choice but to opt for alternative lending products like hers.
Brian Walsh, a certified financial planner at SoFi, another personal finance firm, advises people “not to overreact” to the changes. “Your credit score is important, but it is more important to practice sound financial habits such as living below your means, having an emergency fund, using debt responsibly, and saving for the long term.” It’s solid advice in any scenario.
A question for you, dear readers: What do you think of the credit score changes? Would you consider taking a personal loan, or have you already done so? What was your experience? Will you reconsider doing so in the future?
Shoot us a line. We would love to know your thoughts.
Robert Hackett
DECENTRALIZED NEWS
This edition of The Ledger was curated by David Z. Morris. Contact him at david.morris@fortune.com.
Credits
Deutsche Bank says digital currencies could be mainstream in 2 years ... Bitcoin experiences a rare 'stale block', briefly splitting the blockchain (without much consequence) ... StubHub will now offer you a loan to pay for an event ticket ... Dollars are flowing more freely in Venezuela ... Andreessen Horowitz thinks every company will be a fintech ... Demand for international business payments is rising.
Debits
Former Wells Fargo CEO John Stumpf personally fined $17.5 million for his role in the bank's fake-accounts scheme ... London loses its status as the world's financial hub ... The Consumer Financial Protection Bureau announces new enforcement limitations, which critics say will "protect dishonest businesses" ... Opera accused of operating predatory microfinance apps targeting Africa and Asia ... Kenya's biometric ID initiative faces accusations of bias ... StubHub (again) may be actively trading its own ticket inventory.
BRAINSTORM A.I. 2020
If you’re interested to learn how some of the biggest, most influential companies are strategizing about artificial intelligence, come to Fortune’s Brainstorm A.I. conference in Boston on April 27-28, 2020. A.I. is a game-changing technology that promises to revolutionize business, but it can be confusing and mysterious to executives. The savviest leaders know how to cut through the deluge of A.I. buzzwords and reap the technology’s benefits.
Attendees of this invite-only confab can take part in cutting-edge conversations with top corporate execs, leading A.I. thinkers, and power players. Among them: United States Chief Technology Officer Michael Kratsios; Accenture CEO Julie Sweet; Land O’Lakes CEO Beth Ford; Siemens U.S. CEO Barbara Humpton; Royal Philips NV CEO Frans van Houten; Landing AI founder and CEO Andrew Ng; Robust.AI founder and CEO Gary Marcus; and top machine learning experts from Bank of America, Dow, Verizon, Slack, Zoom, Pinterest, Lyft, and MIT. You can request an invitation here.
FOMO NO MO'
FinCEN thresholds are established through a democratic process. Implicit in this is some sort of consent by citizens to give up fixed amounts of convenience and privacy in return for security. These thresholds are debated in Congress and the Senate, and lawmakers are held accountable for their decisions . . . Not so with inflation-induced AML creep. The authorities have reduced the real value of the CTR trigger from $68,000 to $10,000 in 50 years — without having to pass anything into law!
From a fascinating analysis by J.P. Koning writing at the American Institute for Economic Research. Koning finds that, because they're not adjusted for inflation, anti-money laundering provisions in banking and finance laws have become hugely more burdensome on service providers-and a much larger imposition on the privacy of U.S. citizens.
BUBBLE-O-METER
8.2%
That's the rise in fraud attacks against online lenders over 24 months ending last October, according to a Lexis Nexis analysis. The rise of deepfakes, among other factors, presents new risks for entities vetting borrowers online.
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MEMES AND MUMBLES
If the value of bitcoin depends on scarcity, well, so might the value of Space Ice Cream. Perhaps Dippin' Dots can even be ... a new form of money?
From the initial thread's premise in commodity (or financial?) absurdism, the replies just got stranger.
Even supermodel (and Person Who is on Twitter Too Much) Chrissy Teigen chimed in.
We're allllll learning about scarcity.