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Will FlexScore Replace Credit Scores?

Kimberly Palmer

According to Jason Gordo and Jeff Burrow, creators of the new financial scoring system FlexScore, people have two main questions about their money: "How am I doing?" and "How do I improve my current situation?"

As financial advisors, Gordo and Burrow were used to meeting with clients and trying to help them manage their money, but they were frustrated by how difficult that process could be. They wanted an easy way to give people an answer to those two big questions - an assessment of their financial well-being and a road map for improving their finances. That's why they developed FlexScore, which generates scores along with ideas for how to increase the score, based on a wide range of financial factors, including savings accounts, insurance policies and estate planning. Earning the maximum score of 1,000 means you're financially independent, Gordo explains. (The lowest score is technically a zero, but most beginners start closer to 150.)

"We felt there needed to be one score for a person to rely on if they were trying to figure out if they were financially independent. Then, once you have the score, there has to be ways to improve. The combination of the score and the to-do list is the horsepower of FlexScore," Gordo says.

[Read: Why You Shouldn't Share Your Good Credit Score on Facebook.]

One tool within FlexScore allows users to model potential decisions, like buying a home, to see how the rest of their financial lives could be affected. "Now you can make informed decisions about your life based on the scoring tool - maybe I'm way ahead of the game and can retire earlier or can buy that second home," Gordo says. Another tool provides a "peer ranking," so users can see how they compare to people with similar profiles. An online FlexScore learning center offers videos explaining topics ranging from inflation to estate planning, and users earn points by watching them.

Recommended action items might include taking out more life insurance, getting a lower-interest rate credit card or learning more about estate planning. FlexScore refers users to related websites, such as Insure.com or Bankrate.com, which allows the company to earn referral fees. FlexScore's business model also includes earning licensing fees from banks or other financial institutions that pay to incorporate the tool into their own websites for customers.

FlexScore also licenses the tool directly to financial advisors who pay a monthly licensing fee to use the tool with their clients. (However, anyone can use the core part of the tool for free by creating an account.)

And this is just the beginning. Gordo says he wants FlexScore to eventually replace, or at least be used in tandem with, credit scores as a way of measuring people's financial health and ability to take on credit. "Our aim is to become an industry standard by which people measure themselves financially. It's much more complete and complex than a credit score," Gordo says. "The credit score is a black box logarithm that nobody understands. FICO invented it in the 1950s - it's very confusing," he adds.

[Read: How to Avoid Online Ticket Scammers.]

Gordo and Burrow have a long way to go to make that goal a reality. Kristine Snyder, a spokeswoman for the credit bureau Experian, says she is not familiar with FlexScore, although she says she can't see a score based on self-reported information being more valuable or more reliable than what is currently available today.

Anthony Sprauve, a spokesman for FICO, wrote in an email that the FICO score is "the most predictive tool" for evaluating consumer creditworthiness. "We continually evaluate new and alternative types of data for use in our credit scores. However, we only incorporate such data into our scores after extensive scientific testing has proven that the data is predictive of consumer credit risk and after ensuring that such data is compliant with all fair credit laws and regulations," he wrote.

The FICO Score, he adds, does not attempt to measure an individual's overall financial well-being, or look at income, assets or employment status, but instead focuses exclusively on the probability that a person will repay his or her credit obligations. "The FICO Score is designed to help ensure that every consumer, regardless of economic status, is treated fairly and objectively by lenders," he wrote.

While FlexScores are currently based on self-reported data, Gordo says he and Burrow are constantly updating the scoring system, and soon it will be connected to people's savings, investments and other financial accounts to bypass the need for self-reporting. Gordo also acknowledges the tool is still in its early stages, since it became publicly available in beta form in October. "We have to build a bigger following first - before banks and institutions would take us seriously as a financial success score when evaluating people who would borrow money - but two or three years down the road, your FlexScore will be important," he says.

[Read: Why You Should Start Tweeting at Your Bank.]

However, privacy is one potential concern. Sara Grillo, a chartered financial analyst based in New York, says while she applauds FlexScore for encouraging people to think about their money, consumers might be hesitant to share financial details about their lives with a name that is still unfamiliar to most of them - as they should be.

According to Gordo, FlexScore accounts are protected by "bank-level" security with encryption. The site also doesn't store certain personal information such as Social Security numbers or physical addresses. While Gordo declined to share how many users have signed up for FlexScore, he says it is more than 10,000, and the number has tripled since September when they presented their tool at the Finovate conference in New York.

One of those users, John Patterson, 35, an officer in the California Highway Patrol, says the tool inspired him to look into long-term care insurance, as well as reconsider his estate plans and talk to his father about his financial well-being. "It made me sit down and make sure everything is how we wanted it," he says.

Indeed, the greatest benefit of FlexScore might be just that. While it's not yet clear if lenders will start to use FlexScore as a method of judging creditworthiness, "one positive appeal to a broader measure of financial well-being driven by user input is that it causes individuals to be more mindful, conscious and connected to their finances," says Manisha Thakor, founder of MoneyZen Wealth Management.

For now, that's exactly what Gordo hopes will happen. Then, he can take on credit scores.

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