Short term retail loans known as buy now, pay later loans have exploded in popularity over the past five years, offering consumers a quick and easy way to stretch out payment on a multitude of purchases. Until now, these loans were not reported to the credit bureaus and therefore did not generally figure into a consumer’s credit score (unless the buyer missed a payment — then whammo).
That is about to change. Fair Isaac Corp., creator of the ubiquitous FICO score, is rolling out a new version of the credit metric that factors in these loans. Lenders have increasingly demanded a better measure that factors in the surging use of these previously unreported loans, and Fair Isaac has responded. The company’s latest version of its credit scoring model, scheduled to roll out later this year, incorporates new reporting on millions of instant loans issued at checkout. Frequent users of these loans should take note.
The concept of a quantitative assessment of consumer creditworthiness traces its origin to the mid-19th century. The Mercantile Agency, predecessor of Dun and Bradstreet, was founded in 1841 to provide credit assessments to subscribers, primarily in business to business transactions. In response to burgeoning consumer demand for credit, the Retail Credit Co. was founded in 1899 to compile borrowing histories and furnish reports to retail merchants and finance companies. The firm changed its name to Equifax in 1975.
In 1956, engineer Bill Fair and mathematician Earl Isaac set out to harness the power of computer data analytics to improve business decision-making. Investing $400 each, they founded Fair, Isaac and Co. (later known as Fair Isaac Corp. or FICO) and built an early credit scoring algorithm in 1958.
Fair, Isaac and Co. introduced the first standardized credit bureau scoring model, the eponymous FICO score, in 1981. Since that time, the firm has released several revisions and improvements to the FICO scoring system, which is now utilized in over 90% of all consumer credit decisions in the U.S.