HUGE changes coming to your Credit Score in 2019…

What's up you guys, it's Graham here. So, as you guys know, I like to variate the topics I have in this channel, from real estate investing to personal finance, all the way to passive income and what to do when you win the 1.6 billion dollar Mega Millions lottery.

But today, we have another topic to cover, and that is the introduction of a new method of credit scoring called the Ultra FICO score. This is a new method of scoring your credit which could dramatically boost your score in 2019. So let's discuss this, and I'll break down why you should care in the first place, why this matters, how this can increase your credit score, and how you can use all of this to make more money. Because who doesn't like making more money? You like making more money! Just make sure to hit the like button.

This channel is getting so cringy; just hit the like! I shouldn't have to ask you guys to hit the like, but just hit it! Just always, always hit the like button.

So anyway, here's what this means. Since the early 1990s, lenders have based about 90% of their decision of whether or not to extend you credit based off the credit scoring model called the FICO score. This is a score that calculates how many open lines of credit you have, how much of that you actually end up using, your payment history in terms of always paying it off on time, and how long your history is of doing that.

Now, in order for someone to really gain a robust score to get the best rates for mortgages, auto loans, credit cards, and everything else you need a loan for, it really just becomes a game of patience and strategy to play into this credit scoring method. But with this, you often come up against a catch-22 because in order to prove you're responsible to get credit, you first have to have credit. But then to have credit in the first place, you have to prove you're responsible enough to pay it off on time, and it just becomes this worthless loop.

Now, normally I would recommend someone just put down three hundred dollars for a secured credit card, pay that off on time for six months, and then go and apply for an unsecured card later to start building their credit. But this could now all change—introducing, drum roll—but you already know it from the title so it doesn't matter anyway. It's called the Ultra FICO score.

The idea behind this is to allow lenders to extend credit to more borrowers by taking into account the borrower's history of cash transactions in their bank account. The new scoring method will consider how borrowers manage their checking, saving, and money market accounts, consider their average balance in those accounts, and whether or not those accounts have ever been overdrawn. Starting in 2019, the Ultra FICO score is really just meant to be an additional bonus, optional extra that lenders can use in the event the borrower's denied based off their traditional FICO score.

There, from there, the borrower can choose— I can't say borrower anymore; it's just like once you've started to say borrower like 20 times, it starts to lose its meaning, and then you can't say it anymore. So anyway, let me try saying this again because I can't say it right now. Okay, hold on— from there, the borrower—I'm just gonna say the person.

From there, the person can then choose which bank accounts to recalculate their Ultra FICO score from. Okay, so the concept seems pretty simple enough; we get it! But let's get to the good stuff here, and this is what I think about it because I get very opinionated when it comes to anything regarding credit cards or debt or anything of the like. This is my opinion on this now.

In order to do this as balanced as I possibly can, so you guys don't get triggered and upset and start typing out angry comments in the comments section, I'm gonna be doing what's called a criticism sandwich. So I'm gonna be starting with the top loaf of bread, something positive. I think the meat right there is gonna be all the negatives, and then the other piece of bread is gonna be another positive. So we sandwich that in there. Okay, you're ready? Let's try this.

So let's not start off with the good, and we're gonna start with the bottom piece of positivity bread, and that is that this could help out a lot of people who are caught in what I like to call the credit card Twilight Zone, which is where they don't really have any credit just because they've never needed it.

Now, for those of you that don't know this, that was me when I was 21. When I was 21 years old, I went to apply for some mortgages because I wanted to start buying real estate, and no bank wanted to give me a loan simply because I didn't have any credit. The reason I didn't have any credit was because I never needed it. I bought everything in cash! I had over a hundred thousand dollars at the time saved up, and my savings account never needed any debt. And I wanted to use that responsibly.

I've also had my checking account since I was fifteen years old. I've never once been overdrawn on that account; I've never once had any unpaid bill whatsoever, and I considered myself being like ultra responsible to the point I thought the bank would love me simply because I never needed debt. So yeah, you know about that—basically, all the banks denied me because I had zero history ever managing any sort of debt, which just seems counterintuitive to me because I've never needed debt.

Now, this new scoring method could help people like former me in 2011 go and get loans, mortgages, and credit cards if they have a history of properly managing their finances and they have cash in the bank. We're also considering that there are many wealthy foreigners out there who just moved to the U.S. and have cash in the bank. They have the income, but they haven't had the time to build up their credit.

And because of that, they end up getting denied on their loans. Or consider all the other people out there who maybe only have one credit card, and they've had that for six years and they've always paid it off on time in full. But because they don't have enough credit and they haven't proven that they're responsible along multiple lines of credit, they end up getting denied.

So this new Ultra FICO scoring credit method— that was a lot to say! Ultra scoring—only Ultra FICO scoring credit method! Okay, so anyway, so that could end up extending credit to a lot of other people who wouldn't ordinarily be eligible to get the loan.

Okay, so this all sounds pretty good, and I'll admit, when given to the right people in the right situations, I am absolutely all for it. As much as I love talking about credit cards and credit scores, I've gotta say it's far from a perfect system. If you end up wanting to get the top score, you really just gotta play into the bank's game of getting enough credit, paying it off on time, having history. It's almost like playing a game of chess, except with your credit cards.

So anyway, here's how I interpret this: after the whole 2008-2009 recession, banks have really only gone after affluent, creditworthy borrowers because they couldn't afford to take any risk whatsoever. So if you had money, if you had the income, and if you had a great credit score, banks would bend over backwards just to give you a loan. And when you qualified, banks would give you the best treatment you've ever seen and also give you the best rates on anything you apply for.

But ten years later, this whole affluent, creditworthy borrowing market is pretty much tapped out. I mean, consider me for example; I just ended up getting a loan a few weeks ago, and pretty much done. I'm just gonna pretty much chill for the most part and enjoy all the hard work I've done in the last ten years because now that rates are getting a little bit higher, I figured why take the risk?

But what about everyone else out there who did not get a loan? Hmm, I really see this new scoring method as a way for banks and lenders to loosen regulations to expand the market to whom they can lend money to. Many regulators have also expressed interest in exploring ways to increase access to affordable lending for consumers who have no or low credit scores.

Now, as I mentioned in a previous video, I personally believe that now we're starting to see the economy cool off a little bit from its insane growth it's experienced over the last few years, and it's really starting to normalize. I think this is a great healthy way for any economy to act, but what we might start seeing instead is regulators allowing more access to credit and lending money to people who wouldn't ordinarily get credit or get money, thus continuing the cycle for these prices to go a little bit higher a little bit longer.

But my concern here is, at what point does this all stop? The more loans that people take out, the riskier the market becomes, and the higher the chances of people then defaulting on their loans. Now, this is all happening at a time where the consumer credit market appears to be extremely healthy. Unemployment right now is at record lows, and personal loan balances—including credit cards, auto loans, and other personal loans—are at record highs. And lenders are continually looking for more ways to expand the loan volume.

Now, my personal thought on this—and I usually don't give too many of my personal thoughts on it—but here's my personal thought on this: call me crazy, but don't fix what isn't broken. See, we got into this entire predicament because banks were lending money to people who should not be lent money. And yes, low interest rates helped recover the economy, but over the last 10 years since then, banks have been very strict about who they lend money to, which has really ended up helping the economy. So why mess with what has worked?

Now, my other concern with this—and we're gonna keep piling meat onto this negativity sandwich—so just consider this like the cheese. This is the negativity on the sandwich. But the requirements needed for this Ultra FICO score are just absurdly low. Now, get this because I can't even make this up: consumers with an average balance of at least $400 who haven't overdrawn in the prior three months would likely get a boost.

Okay, so an average balance of $400 who hasn't overdrawn their account in the last three months? Who comes up with that? I feel like this is some third-grade level scoring system here! It's like if you get an F, the teacher automatically just turns that F into a 50%. Like at least just make it like a $10,000 average bank account balance and you haven't overdrawn your accounts in like two years—not four hundred dollars in three months! Just something! It's just something a little bit better, you know?

This whole thing just really seems like an excuse to continue giving people loans they really shouldn't get loans for in the first place without really proving that they can handle the loan responsibly. To me, it's almost like having a good credit score at this point is really the equivalent of having skin in the game, or if you've spent a decade of your life crafting and playing the perfect credit score, getting the perfect credit cards, paying off everything on time, chances are you're not going to ruin a decade's worth of work because you simply missed a payment. You're gonna be extra vigilant to make sure it stays that way because you put so much work, and time, and effort into that.

Now compare that to the Ultra FICO scoring credit method, where maybe you only had a credit card for four months, pay that off on time for a few months, have four hundred dollars in your bank account, and you haven't overdrawn that in like three and a half months—well, you should see a credit score boost! But because you haven't really done that much to get it, you really don't have the skin in the game to really have that desire to make sure it's always paid off on time and in full.

But here's the reality, and I'm gonna end this off with a bit of the positivity of the top bun that goes on this criticism sandwich here: but for the right people in the right hands, I really do believe this is a good thing! I know so many financially literate people who just decided never to play the credit card scoring game simply because they never needed to, and they were undeservedly turned down for loans simply because they never ended up playing that credit scoring game and didn't have the credit score to get the top rate or the top loan they wanted.

I was in the exact same position when I couldn't get a loan on a mortgage simply because I never had a credit card because I never needed it. So I think for the right people in the right hands, this can absolutely help out a lot of people who deserve it.

Now, FICO says this is really just a way to fill in the cracks to an underserved market and ease up lending to certain individuals who wouldn't ordinarily get the loan. Fails to say this isn't really a way to weed out applicants either; instead, it's designed to boost the number of approvals for credit cards, personal loans, and other debt by taking into account a borrower's history of cash transactions, which could indicate how likely they are to repay.

So I'm a bit more cautious when it comes to this because I believe that if having fewer people qualify for a loan who would otherwise be great candidates means people who should not be getting a loan don't get a loan, then I just think that's a sacrifice that needs to be made for the greater good. But we'll see what ends up happening.

I think realistically we'll see a very minimal effect from this because when lenders look to extend credit, they don't just look at a credit score; they also look at the person's income and debt-to-income ratio. But I do believe this sets the precedent that we will continue to ease up on lending regulations, especially as we're coming from such a healthy market and one of the longest bull runs we have seen in history— and that I believe is just a little bit risky.

When things are going good, that's when you keep things exactly the same as they should, and you don't really change things. But we'll see what happens. Let me know your thoughts down below. And if you guys haven't already, smash that like button! Make sure to smash the like button!

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