Should We Live in a “FICO-Free” Zone?

At least one big lender is bucking tradition by ignoring FICO Scores when deciding whether to approve a loan applicant. Is this a new trend, or are for-profit lenders just doing what credit unions have done for years?

Ignoring FICO Scores (and other credit scores) would indeed be a new trend. These scores have been used as a basis for determining someone’s credit-worthiness for decades.

FICO takes data from the big credit bureaus, and uses it to create a single credit score for nearly every American. In many ways, your FICO Score is a big determiner of whether you can finance a car or house, get a credit card – or even pass muster in a job interview process.

So, it makes news when a large lender enacts a new policy of ignoring FICO Score data altogether. This is just what lender SoFi is doing.

One Lender Bucks the Trend

SoFi is an online lending specialist that has issued more than $6 billion dollars in loans, including student loan refinancing, mortgages and personal loans.

The company recently announced that it no longer factors FICO scores into its loan qualification process. Instead, the company said it considers employment history, track record of meeting financial obligations and monthly cash flow minus expenses to determine if an applicant is qualified for its loan products.

According to SoFi, this change in policy is part of a larger lending industry trend toward evaluating non-traditional factors during the application process.

It’s also a matter of catering to today’s young borrowers. SoFi – citing Princeton Survey Research Associates International data – points out that 63% of Millennials (Americans aged 18 to 29) don’t have a credit card.

Many of these young customers are essentially “flying under the radar” of where traditional credit scoring models – which are based largely on credit card usage – typically operate.

Young people who lack credit cards may have very low credit scores, but may in fact be good credit risks. For this reason, it makes sense to look at more than just a credit score when evaluating the credit-worthiness of loan applicants.

But wait, don’t credit unions already do this?

While it may be a departure from convention to completely ignore credit scores, the practice of looking at other factors besides credit scores when evaluating a loan application is nothing new.

In fact, credit unions have been doing this all along. People who apply for loans at credit unions are CU members, or part-owners of the CU. It is the basic business model of CUs to offer personal service that is tailored to each member — and the lending process is no exception.

CUs are typically small, community-based lenders. They keep more of their loans in-house (as opposed to selling them off), than banks typically do. CUs also cater to a wider range of members than banks typically do, including students and lower-income folks who often lack extensive credit histories.

For all these reasons, credit unions look beyond a simple credit score when evaluating a loan applicant. Doing so is in the best interests of the applicant/CU member, as well as the CU itself.

Of course, most CUs will also take credit scores into account; they’re not “FICO Free Zones” – at least not yet. Either this new system SoFi uses is a marketing ploy, or it is a genuine protest against the inadequacies of credit scoring systems. Or both?

Time will tell if this is the way of the future. For now, borrowers can always turn to credit unions if they want to deal with a lender that takes the “whole person” into account.