What's FICO Missing?

What is FICO?

FICO is a data analytics company specializing in credit scoring. Founded in 1956, it is best known for its FICO credit score (a single number ranging from 300 to 850), which is widely used by lenders and landlords to assess an applicant's creditworthiness and payment behavior. In the context of resident screening, a FICO score is typically the very first screening criteria for an applicant, or the "first line of defense," before additional data is reviewed. A higher FICO score indicates a lower risk of default and a higher likelihood of on-time and in full lease payments.

TransUnion, Equifax, and Experian

TransUnion, Equifax, and Experian are three of the largest credit reporting agencies in the U.S ("the big 3"). Similar to FICO, they collect and maintain financial and personal information and provide credit reports to lenders, businesses, and consumers. These reports feature specific "tradelines" about a consumer (e.g., utilities, credit card, or loan repayments) that provide a more detailed picture of a person's creditworthiness. While the vast majority of information they collect on consumers is similar, there are some differences. FICO aggregates and summarizes this data into a single score rather than a full and less digestible report of detailed tradeline data.

Landlords do not report

Landlords are not required, nor financially incentivized, to report rent payments to the big 3 credit bureaus. As a result, very few landlords do (less than 3%). Unlike credit card companies, utility companies, or employers, who report consumers' payments and income like clockwork every month, landlords rarely, if ever, voluntarily or proactively report rent payments to the bureaus. Without an economic incentive, most real estate operators shy away from the complexity and cost of what's called "Metro 2" reporting rent payments to TransUnion, Equifax, or Experian.

Near-zero visibility into rent

As a result of this dynamic and lack of incentives for landlords, the largest expense in most Americans' lives goes un-reported to the bureaus. You read that right! FICO has near-zero visibility into the largest expense in most Americans' lives: rent.

Landlords are "flying blind"

Because landlords do not report, they do not have access to critical rent performance data for their applicants - a classic collective action problem. Instead, leasing professionals are forced to try and triangulate around rent performance with imperfect proxies — such as credit card or utilities payments and income ratios. These metrics are good, but access to apples-to-apples data (i.e., historical rent payments to predict future rent payments) is better.

Positive signal: lost revenue

For Class B or C landlords or manufactured housing operators, many of the applicants have "thin" credit, which is not to be confused with "bad" credit. Many of these folks are great renters, but you wouldn't know it! Their FICO score is effectively "invisible." They don't have any credit cards or loans, so FICO scores them low simply based on their lack of a track record rather than a negative history of non-payment or default. If rent was included, their score would be substantially higher. Trigo's data can make those credit invisibles "visible" with the "positive signal" of unreported rent data. This level's the playing field for renters across the U.S. It also helps increase your occupancy and approval criteria, which leads to more revenue and NOI. FICO scores are a helpful crude filtering mechanism but are an incomplete metric. A more complete picture is needed, particularly in lower- or middle-market renting communities with more credit "invisibles."

Negative signal: missed red flags

The inverse is also true. With near-zero visibility into the largest expense into applicants' life (rent), traditional credit and resident screening misses a lot. This leaves operators and owners exposed to increased applicant fraud, bad debt, costly evictions, delinquencies, and property damage. See our blog post Blind Spots in Resident Screening to learn more and dive deeper on this topic.

Conclusion

More complete data can have material economic benefits for your business. Traditional tools such as FICO are helpful filtering mechanisms but often require supplemental data to adequately understand a fuller picture of an applicant's ability and willingness to pay. Without rent data, landlords and lenders are flying blind, leaving good tenants and revenue on the table, as well as missing major red flags and critical eviction and delinquency data not available in FICO or from the big 3 credit bureaus.