Filling in the credit history blanks

The traditional wisdom about applying for a mortgage sounds a lot like the kind of advice that young job seekers get sick of hearing: You have to have credit to get credit.

That is, you need a track record that proves your creditworthiness. The financial services industry estimates that though there are about 160 million adults in this country who have documented credit histories, there may be as many as 50 million others who fly beneath the radar of FICO, the database maintained by Fair Isaac Corp. to create the credit scores that, for better or worse, America lives by.

It’s likely that a significant majority of those 50 million consumers are immigrants, whose sheer numbers are beginning to wake up the housing industry to their potential as customers. Others include people with low incomes who tend to abide in a cash economy, young adults and the recently widowed or divorced.

The industry does a fair amount of business in “no doc” or “low doc” loans, typically for borrowers who may not have W-2 forms to prove their incomes. They may be self-employed or seasonal workers or may earn a high proportion of their earnings as tips.

The criteria for just how much documentation these loans need to pass muster may vary from lender to lender, but usually the loans have higher interest rates because they are presumed to carry a higher risk.

Fair Isaac recently took a big step toward bringing these borrowers into the mainstream by unveiling a new credit-scoring program that will include nontraditional data sources, such as whether an applicant has a stable checking-account history (that is, he or she doesn’t habitually bounce checks), any history of “payday loans,” and track records with landlords and utility companies.

These FICO Expansion Scores will range from 150 to 950, with consumers who are better credit risks at the top of the scale.

The emergence of these scores is a barometer of our economic times. Some advocates of affordable housing say such a change opens a door into the mainstream economy for many people who are otherwise shut out.

As laudable as that is, the bigger rationale is just a business one. With mortgage mania on the wane, lenders are scrambling to find new customer bases, so they’re looking for underserved markets.

It will remain to be seen whether it’s fiscally wise to extend debt so broadly to those who don’t meet the traditional guidelines.