The Catch-22 of the credit world is that you can’t get credit unless you have a credit score, but you can’t get a credit score unless you have credit in the first place.
Since 1989, the FICO score is the prevailing metric that measures the probability that you'll repay a loan, whether it is a mortgage, an auto loan or a credit card bill. The score ranges from 300 to 850. These days, employers, landlords and even prospective dates use credit scores as a proxy for a "deadbeat" metric.
After nearly 30 years, FICO thinks it has a way to use big data to solve the problem of getting people started on the road to a credit history. Instead of just looking at past credit card payment history, FICO XD looks deep into a database that has payment data on a person's utility, cable, telephone bills and, to a lesser extent, rental payment data.
“We’re able to score an additional 50 million people,” said William Lansing, FICO’s chief executive.
Millennials who are just getting started in the workforce would be beneficiaries of the new system, as would immigrants and anyone who has previously eschewed a credit card for whatever reason. "There are a lot of people like that, trying to break into the financial system and get connected," says Lansing.
If you are applying for some kind of credit, the bank will run your information through the traditional FICO database. If you come up blank, they will have the option of running you through the FICO XD system (if the lender subscribes). If you have enough data in the new system, you would be assigned a score on the same number scale as the regular FICO score. The bank would then use that score to determine whether to approve your application.
FICO has been running tests with 12 banks, Lansing said. About a third of those previously not scored rated 620 or more on the XD scale, which is the common dividing line where banks are comfortable extending credit.
“Then very quickly, the person builds up enough history, and then they really are in the system,” he said.
A person's XD score should be roughly the same as their regular FICO score once they get going, Lansing added, because if you pay your cable and electric bill on time regularly, you're likely to pay your new credit card on time too.
The XD program does nothing for those already in the regular FICO system who have bad credit. To find out your credit score, it may be available from your bank, or you can get a free annual copy of your credit report (but not the three-digit score). For those with scores below 620, the only way to raise scores is the traditional route: Start paying your bills on time.