As everyone knows, your FICO score determines your creditworthiness - at least in the United States. And as everyone also knows, the factors that go into making up that score remain somewhat shrouded in mystery.
Originally named after the Fair, Isaac Company (FICO), and first introduced 25 years ago, FICO scores are common to all three of the main credit bureaus used in North America, and used by virtually everyone in the lending business - thrifts, credit unions, banks - and, nowadays, online lenders as well.
The welcome difference between the online lenders and the traditional lenders, however, is that the online guys are going to some lengths to explain the thinking behind the rate you are being offered - a much more welcome approach than the opaque nature of consumer finance prior to the internet age.
Yes, thanks to Lending Club, Prosper, and other P2P lenders, the veil is starting to become unspun, with the result that borrowers - if they are willing to spend some time - can now get a better handle than ever before on what makes up their score - and, most critically, what makes a lender lend. So let's take a look at how the factors that determine your online credit rating stack up against the more traditional approaches used in determining your FICO Score.
1. Payment History
According to several online sources, your payment history (i.e. your record of paying on time, or defaulting, in the case of not paying) determines roughly a third or more of your FICO Score. Given that most online lenders require a score of at least 640 to get started, giving up 350 points because of a poor payment history can easily stamp out any hope of a successful application.
Do the online lenders treat you any differently? The answer is no - the top two lenders base their ratings on FICO as well - except in situations where you have borrowed from them before. A previous successful history of borrowing can lower your costs significantly on Prosper and Lending Club - but you'll need a FICO score of above 640 (Prosper) or 660 (Lending Club) to start earning your stripes!
2. Debt Burden
Both the online guys and the traditional lenders look closely at debt burden - the rumored second-largest factor of a FICO Score. According to the specification of FICO 9, consumers with high amounts of revolving debt are at "greater risk of bankruptcy" - and FICO 9 now scores this factor independently (the online guys feel the same way.) And not just obvious burdens are negative - "thin files" (lack of data) are also looked at with greater rigor now - the online equivalent (having no prior P2P loans) carries similar penalties.
As for other factors, such as medical debt versus non-medical debt, it has long been assumed that medical debt is of poorer quality - FICO 9's separate treatment of medical debt is matches by the online lending firm's ability to know (and score) the loan purpose out of the box.
Note: FICO 9 now excludes fully-paid collections from their scoring algorithm - a long-overdue improvement.
3. Quality of Account Data
Both FICO and the P2P guys look not only at the length of time you've been active within the finance community, but how many accounts you have (too few = bad, too many = okay), and how long you've maintained them. According to several sources, this element can account for up to 15% of your score.
4. The Number of Times Your Bureau Accounts Get Pinged
If lenders are reaching out and pulling your FICO score down from the bureaus, and no loans are being issued as a result, this can have a negative effect on your score. Which is why both Lending Club and Prosper don't ping the bureaus until your loan is listed.
5. The Other Stuff
The great advantage that online P2P lenders have over everyone else, is they can use vast amounts of data (including data obtained through FICO) and combine that with things like the amount you have requested and the purpose of the loan to generate an instant understanding of the quality of the loan.
Some of the factors in play here will include the purpose of the loan (see the piece on medical debt above), the amount requested (both Prosper and Lending Club penalize lenders who request amounts above their published "optimal loan amounts"), the user's previous history on the site, your employment status (self-employed people are bad credit risks, generally), and the term of the loan (Lending Club states clearly that you will get a better rate on a shorter term loan.)