Not everyone can receive a credit score—and that’s a big problem for FICO, which sells credit scores as their primary business. According to FICO, 53 million people (known as “credit invisibles”) don’t have any or enough data in their credit reports for FICO to generate a score. 1
For those people, it’s much harder to get credit or loans because lenders won’t trust them to pay them back. For lenders, they miss out on selling credit and loans to people who may actually be trustworthy.
FICO’s Score XD is their solution to this problem. Here’s how it works and how you’ll be scored if you’re in the credit invisible demographic.
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What is FICO Score XD?
FICO Score XD is a credit-scoring model that uses alternative data, like utility or cellphone bill payments, to help score people without traditional credit (known as “credit invisibles”).
It was developed in a partnership between FICO, LexisNexis Risk Solutions, and Equifax as a solution to the problem of scoring otherwise “unscorable” people.
The first model, FICO Score XD, was released in 2016, followed by an updated version, FICO Score XD 2, in 2018. 2 Note that despite the update, FICO still refers to the newer model as FICO Score XD, which we do in this article as well.
With FICO Score XD, FICO claims that: 1
- 26 million previously unscorable consumers are now scorable, increasing the scorable population from 91% to 98%
- 11 million of those now-scorable people have no credit files whatsoever
- Nearly 9 million newly scorable consumers receive a credit score of 620 (a common lending threshold) or above
- 75% of those newly-scored consumers that end up getting credit maintain a high FICO score in the following 24 months 3
How does FICO Score XD Work?
To generate a score, FICO Score XD blends alternative data that’s not traditionally reported to the credit bureaus with normal data.
That alternative data includes payments related to:
- Landline phones
- Mobile phones
- Cable
- Utilities
Where does FICO get this alternative data?
That alternative data is provided by LexisNexus Risk Solutions and the National Consumer Telecom & Utilities Exchange (NCTUE), both of which are “specialty” consumer reporting agencies (CRAs). 4 These CRAs are similar to the three main credit bureaus (Experian, Equifax, and Transunion) in that they collect, record, and share information about you.
However, the information they collect is specialized, related to your employment history, apartment rental payments, bank accounts, or transaction history with specific businesses (aka your phone and utility bills). FICO Score XD even uses information (provided by LexisNexus) about death records to assist lenders with fraud prevention. 5
None of that information is in your three “main” bureau-produced credit reports—and that’s why FICO Score XD was built in a partnership between FICO and those institutions. It was necessary to merge all of this data to build a predictive credit score.
Is alternative data reliable for generating credit scores?
According to FICO, the alternative data they use to score you must pass a rigorous six-point test. (The following six points are a bit information-dense, but to summarize it, FICO essentially claims that the alternative data they use is legitimate, clean, organized, reliable, and useful.)
To be useful, the data must have:
- Regulatory compliance: All data sources must comply with the Fair Credit Reporting Act (FCRA)
- Depth of information: Information should be broad and comprehensive, not narrow and focused. For instance, rental payments over many years at many addresses, not just one address in recent months.
- Scope and consistency of coverage: Useful data covers a broad percentage of the population, and is reported consistently. For instance, 90% of adults have cell phones, and bill payments are reported consistently—that’s useful data.
- Accuracy: Useful data is clean and managed well. For instance, a database of consumers’ self-reported data may be inaccurate (due to user input error or dishonesty).
- Predictiveness: Useful data predicts future consumer repayment behavior consistently. For instance, data shows that people who stay at one address for a longer period of time are more likely to repay their debts than people who move frequently.
- Additional value: Useful data adds context to what’s in a consumer’s credit report and doesn’t repeat it. For instance, cable bill and utility data doesn’t exist in credit reports, making it useful supplementary data.
What’s the point of FICO Score XD?
As a company, FICO’s primary method of earning money is by selling credit scores to lenders. Those credit scores need to be accurate, or lenders won’t buy them. However, in order to be accurate, FICO needs enough behavioral data from your credit report.
Scoring “credit invisibles”
But what if you’re young and have never applied for loans or credit before? Or you simply live without loans or credit, or use as little as you can? In the credit industry, people like this are known as “credit invisibles.” They have nonexistent, thin, or stale credit files that make financial behavior prediction much more difficult.
For companies like FICO, this poses a challenge and creates tension between business goals:
- If they could accurately score those 50 million people, they could sell a lot more credit scores.
- On the other hand, if done incorrectly, scoring those people may lead to selling inaccurate credit scores, causing damage to FICO’s brand.
As mentioned, FICO Score XD is their solution to this problem.
What’s the difference between FICO Score XD and my other FICO credit scores?
If you already have a FICO credit score, you don’t have (or need) a FICO Score XD credit score. If you recently checked your credit or applied for a loan or credit card and were rejected, find out which company’s credit score(s) they checked and which credit-scoring model they used. Those may include:
Although every scoring model calculates your credit score differently, they still look at the same factors, which means that all of your scores will be strongly correlated with each other. The exception, of course, is if you’re credit invisible and your FICO XD score is the only credit score you have at all.
