Building credit is somewhat of a catch-22. You need a credit history to qualify for new credit but you often can’t establish that history without having debt. According to the Consumer Financial Protection Bureau, about 26 million Americans have blank credit reports. For these people, even something like getting a cellphone contract or utility service might require a big deposit.
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Fortunately, FICO is rolling out a new scoring model that will allow many of the folks with no credit history to get a credit score for the first time. Developed by LexisNexis and Equifax, the new FICO XD score is set to make life a little easier for people who were previously unscorable. If you fall into that category, here’s what you need to know.
1. It’s Not the Same As a Traditional FICO Score
The traditional FICO scoring model looks at five factors to calculate your score: payment history, amounts owed, types of credit being used, inquiries for new credit and the age of your accounts. The kinds of accounts that carry weight with a FICO score include revolving debts like credit cards and loans such as mortgages, car loans and student loans.
FICO XD scores are calculated based on your account information from secondary sources. That includes things like your electric bill, cell phone bill and cable bill. If you missed a payment on one of these accounts, it would affect your FICO XD score negatively the same way a late credit card payment would impact a traditional FICO score.
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2. You Can Still Get a Traditional FICO Score
The FICO Score XD is meant to be a stop-gap for people who have no credit history but still need to be able to qualify for loans. Specifically, it allows lenders to make approval decisions when no other credit score is available.
That doesn’t mean, however, that you can’t get a traditional score at some point. According to FICO, people who are scored under the FICO XD model can qualify for a regular FICO score after making at least six months’ worth of on-time payments.
3. It’s Not Your Only Option for Building Credit
The new scoring model is expected to help millions of people establish credit for the first time but it’s not the only way to establish your credit-worthiness. There are other ways to build good credit that don’t rely on the FICO Score XD.
For example, you could apply for a credit builder loan with your bank or local credit union. With this type of loan, you borrow a small amount of money and the bank places it into a secure account. You make monthly payments on the loan with interest and once it’s paid off, the bank releases the money in the account to you. In the meantime, you’ve been building a positive credit history by paying on time.
Related Article: 3 Ways to Build Credit Without a Credit Card
A secured credit card is another way to establish credit from scratch. With this kind of card, you have to put up a cash deposit which usually ranges from $200 to $500. Your credit line is typically the same as the deposit and you’re required to make minimum payments each month, as you would be with an unsecured card. The only catch with these cards is that the interest rates and fees tend to be higher, so it’s a good idea to review the terms carefully before you choose one.
The Bottom Line
FICO XD is expected to become available in 2016. If you currently have no credit history, you might be able to establish one very soon. In the meantime, it’s important to pay your bills on time so that you’ll be able to maintain your FICO XD score.
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