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Goodbye FICO, Hello AI: The Future Of Credit Scores And Home-buying

Goodbye FICO, hello AI: the future of credit scores and home-buying

Named after the Fair Isaac Corporation, FICO scores first came out in 1989. At the time, FICO scores were a game-changer. For the first time in history, lenders were bound to a semblance of objectivity in deciding on who gets what kind of loan. Prior to the creation of FICO scores, lending was a mix of the loanee’s financial standing, the lender’s gut instinct, and both parties’ social skills and connections. The future of credit and lending, however, is looking to take a leap beyond traditional credit scores. 

It took all of history to lead up to the advent of the FICO score. But now, a mere three decades later, fintech poses a serious threat to traditional lending and credit—more specifically, fintech based on artificial intelligence. Why? Because intelligent lending strips FICO scores of their arbitrary measures of credit health. It also gets right at the heart of the only question that matters: what is the likelihood that this loanee will repay their debts? 

Those better able to answer this question hold the keys to the future of credit and lending. Here at Troy Bank & Trust, we want to take that question one step further and ask: what does this mean for your mortgage? 

From FICO To Future: How AI Credit Changes Everything

Reviewing FICO Scores

In theory, your credit score, otherwise known as your FICO score, works as a measure of one’s ability to repay their debts on time. Credit scores measure five fundamental factors:

  1. Credit history: Do you pay your bills on time?  
  2. Outstanding Balance: Are you paying off your credit card bills or maxing out cards left and right? Are you living within your means or hitting up payday loan stores on a regular basis? 
  3. Credit Longevity: How long have you been taking out loans and using credit? The longer, the better.
  4. Credit Mix: What kind of loaner are you? Satisfied with your one Visa credit card? Or do you do it all—a couple of personal loans, a business loan, your mortgage, a car on lease. The more lines of credit and lending, the better your score—as long as you’re paying those bills on time.
  5. Credit frequency: Did you open your last credit card during the Obama administration? The more often you take loans and use credit, the higher your score.  

It doesn’t take long to realize that a high credit score requires some arbitrary financial behavior. While we understand the intent behind credit longevity, for example, there are plenty of responsible new borrowers out there. Churning credit cards, on the other hand, increases credit mix and frequency, which raises credit scores. 

But these behaviors have almost nothing to do with a borrower’s quality. Worse yet, some individuals may have a blemish on their FICO score due to unlikely circumstances, such as an emergency medical bill that disrupted a loan repayment or forced an overleveraged home equity loan. These mistakes can decimate scores for a long time, if not forever. However, they’re more often than not poor indicators of any inability to repay on time. 

AI lending sheds traditional credit scores altogether to become more accurate. Better yet, AI lenders such as Upstart are working with local independent banks across the country, just like Troy Bank, to increase lending opportunities for everyday citizens. 

AI Lending

With the rapid rise of tech, our emotional pendulum swings between excitement and fear when confronted with something new. Automation evokes this pattern as well. While the threat to existing jobs is frightening, the possibilities for new work are seemingly endless. Automation, and its younger, more sophisticated sibling, artificial intelligence, have found the lending industry.

To put it simply, artificial intelligence uses human ingenuity to automate highly complex solutions. You can find traces of AI everywhere these days, including some of the most basic functions on Troy Bank & Trust’s mobile apps. In terms of credit and lending, AI uses decades of data as inputs for projections of how likely a borrower is to repay their loans on time. A lender, banks, and other financial institutions determine interest rates, terms, and conditions based on these projections. The more accurate the projections, the more often lenders can originate loans, and at lower interest rates to boot.

The more people that can access credit, the more opportunities arise among those communities. AI lending started with personal loans, but it’s now spreading to all sectors of the credit industry—including the mortgage sector. 

AI Credit Meets Your Mortgage

The credit and lending industry’s central question is whether a customer will repay their loan on time. So what does AI credit mean for the future of credit and, more specifically, your mortgage loan

We can safely predict that AI lending will increase your opportunity to get a mortgage loan at a more competitive rate. Why? Because AI credit eliminates the arbitrary elements of traditional credit scores. The first-time homebuyer that missed a few student loans in her early twenties due to a big medical expense? AI credit algorithms understand the overstated significance of isolated blemishes taken out of context when computing FICO scores. When her local bank offers a competitive mortgage rate, you can bet that the bigger banks will start to wonder why they’re losing business and begin to fall in line. 

The future of credit and lending excites us here at Troy Bank & Trust. Nothing excites us more than the prospect of AI lending, which has the power to democratize lending and infuse even more power back into local independent banks. When it comes to your mortgage, we’re confident that the best is in store for homebuyers nationwide. 

Troy Bank & Trust wants to help you with your debt and borrowing needs

As a local independent bank, banking with us means you’re also helping your local economy, and we make your banking experience more accessible. Allow us to help you with your checking and savings needs and give you the peace of mind that planning for your loved ones brings. After all, we are “the only bank you’ll ever need.” For more information on working with us for your business needs, visit Troy Bank & Trust here, or reach out to us by phone at 334-566-4000 or 888-258-8769.