To get credit, it helps to have credit. That conundrum captures the chicken-and-egg problem at the core of the America's credit-granting system.
Most lenders rely on one or more of the FICO credit score models, which require applicants to have at least one credit account that's six months old and at least one that's been updated in the previous six months. No credit? No recent credit? No credit score.
There are workarounds, of course, but there's still a huge population of people who are shut out of the system. So the creator of the FICO score hopes a new formula for people with little or no credit history will help lenders build them an on-ramp -- and will succeed where a previous version belly-flopped.
The as-yet unnamed score is the latest attempt by Fair Isaac (FICO) to crack the "underserved" market, or the more than 50 million people who can't be evaluated for credit in the traditional ways. The alternative score uses utility, cable and cell bills, as well as address history, to supplement thin or nonexistent credit files.
A dozen credit card lenders are testing the score, which Fair Isaac hopes to introduce by the end of this year.
The alternative score is the successor to the company's ill-fated Expansion Score, which was launched a few years before the recession wiped out lenders' interest in expanding credit to riskier customers. That score used information from payday lenders, rent-to-own companies and check-monitoring services to gauge how likely people were to default. It was distributed by two lesser-known consumer credit reporting agencies, PRBC and Microbilt.
The new score benefits from better timing and bigger distribution partners -- credit bureau Equifax (EFX) and information service Lexis Nexis, said John Ulzheimer, a credit expert with CreditSesame.com who has worked for both Fair Isaac and Equifax.
"I fully expect this newer FICO score to be considerably more successful than their Expansion score," Ulzheimer said. "Both scores attempt to do the same thing, which is to find the nuggets of gold in the population of consumers who do not have a traditional credit report so that lenders can feel confident offering them products and services."
Fair Isaac started over with the new score, looking for accounts that would show positive information -- bills paid on time and address stability, for instance -- as well as negative information. That includes blemishes such as missed payments and frequent address changes, along with public records related to bankruptcy, foreclosure, evictions, lawsuit settlements and other setbacks.
The new formula can score about 15 million people -- roughly half of those who are applying for credit and whose credit reports are too old or have too little information to generate a FICO score, or who lack a credit file entirely, said David Shellenberger, Fair Isaac's senior director for scoring and predictive analysis.
this population as a whole is riskier than those who have traditional credit, about one-third of those scored would present acceptable risks to many mainstream lenders. After two years, half of these acceptable risks would be able to generate a traditional FICO score of 700 or above, a level typically rated as "good" by lenders.
Fair Isaac isn't the only one trying to crack this market. VantageScore, which was created by the three credit bureaus as a FICO competitor, claims it can score more than 30 million "previously 'unscoreable'" people in part by looking farther back into their credit histories.
Still, people with battered or non-existent credit shouldn't expect to receive tons of mainstream credit card offers in the mail any time soon. FICO is still the dominant score, and it's still uncertain how many lenders will adopt the new formula or how they'll use it.
For now, the best way to build or repair credit still involves getting credit: applying for a low-limit or secured credit card or for a small personal loan from a credit union, or being added as an authorized user on someone else's credit card account.