May 14, 2015
For years I have pointed out how ridiculous it is that people who don’t have credit cards, but responsibly pay-as-they-go with debit cards and cash, are put at a severe disadvantage in our financial system.
That’s because anyone who dares not to have a credit card likely doesn’t have a FICO credit score. And without a FICO credit score it’s all but impossible to get a regular credit card (a bit of a catch-22), or qualify for a mortgage or car loan, and it can even make it hard to rent a home.
Well, there’s potentially good news on the way. FICO has created a companion to its standard scoring system. Instead of relying so heavily on credit cards, the new “alternative” score—it doesn’t have an official name yet -will evaluate data that includes your history of timely payments for:
-Gas and Electric Bills
-Cell Phone and Landline Bills
FICO will also use data that tracks your known addresses; the idea being that the longer you have lived in your current residence, the more stable your finances may be.
FICO says about 15 million people who don’t currently qualify for a standard FICO score will be given a score using the alternative data. Right now FICO’s alternative scores are being shared with a dozen credit card issuers in a pilot program. Consumers who are given a credit card based on this alternative score and then make timely payments on that new card over a six-month period will then be given a standard FICO score.
It’s unfortunate that the “solution” to finally get a traditional FICO score requires getting a credit card in the first place, given that so many people rightfully prefer to avoid credit cards. But I still see this as significant progress. At least we are finally getting recognition that paying your utility bills can be an important gauge of your financial responsibility.
For anyone who has never had a credit card, but is now sent an offer, here’s what you must do before you accept:
• Promise yourself you will only use the card a few times a month.
• Promise yourself you will only charge what you can pay off in full every month. No unpaid balances, do you hear me!
If you can honestly fulfill those two promises, I think it is fine to take advantage of a credit card offer as an entryway to finally getting a standard FICO score.
And it should go without saying that the existence of this new alternative score makes it ever more important to automate all your bill payments. Now that your history paying the cell bill, your water bill, the gas and electric bill etc.…is a building block to a traditional FICO score, you can’t afford to be sloppy and miss payments.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.