And all scores perform the same general function: to use a consumer's credit history to try to predict whether he or she will pay debts in the future.
FICO scores summarize this prediction in a three-digit number that ranges from 300 to 850. People with lower scores are considered higher risks in that they might not repay their debts; people with high scores are considered low risk.
For decades, FICO kept a relatively low profile. Then, in 1995, Fannie Mae and Freddie Mac, the government-sponsored giants that form the backbone of the mortgage industry, decided to start using the FICO score in their computer programs to help decide which consumers qualify for mortgages bought and sold by the companies.
"That's really when it took off," says Evan Hendricks, the founder of PrivacyTimes, who has testified before Congress on credit-scoring matters.
Next came the housing boom. As many banks loosened their lending requirements, they drastically cut back on their own internal underwriting departments, relying more and more on the FICO score to determine whether a consumer was worthy of credit. Soon, Fair Isaac was marketing its score to companies as varied as health insurers and casinos, advertising it as a low-cost way for companies in an array of markets to decide who got credit and who didn't.
That is how a company that most people have never heard of, and even fewer understand, came to play such a pivotal role in the day-to-day functioning of the modern economy.
"FICO is the wizard behind the curtain of the economy," Matt Fellowes, a scholar at the Brookings Institution, told BusinessWeek in 2008. (Fellowes did not respond to calls and emails seeking comment.)
The Basics II: What's in that special sauce?
To arrive at a consumer's credit score, FICO considers a number of different factors, including how many different kinds of credit accounts a consumer has, how much available credit the consumer tends to use and whether the consumer makes payments on time.
FICO updates its scoring model every two or three years, much like Microsoft periodically releases new versions of software, Quinn says. It makes the updates partly to take advantage of new kinds of data and to react to changes in consumer behavior.
For example, many consumers drastically reduced their credit card debt after the financial crash of 2008. In the face of such a broad behavioral change, the model must change too, since what may have been a low credit utilization rate in 2006 might have been simply average by 2009.
"Over time, degradation can occur to any scoring model," says Clifton O'Neal, a spokesman for TransUnion, one of the three national credit bureaus.
The newest version of the scoring model is more precise because it considers more types of consumers. For example, some people have little in the way of credit histories. Comparing those people to all consumers as a whole would leave them with low credit scores, even though many people with little credit history make perfectly fine credit risks. The same goes for people with unpaid bills in their past. In some cases, that may mean three unpaid mortgage payments, which could mean the person is a bad credit risk now. Another person's unpaid bills might be for small medical expenses that she was unaware of.
By dividing people with similar credit histories into different groups and comparing them against people in those groups, FICO is able to give more-accurate predictions of consumers' willingness and ability to pay.
"If you were to build just one scorecard on the whole population, people with previous delinquency would all plummet to the lowest part of the score range, because compared to most other people, they look really risky," says Quinn. "But if you build a scorecard based just on delinquencies, someone with lots of delinquent payments now is riskier than someone with one late payment six years ago. So it helps you find people with less risk."
Whereas the previous model divided consumers into 10 categories, the new one uses 16. That should help lenders make more fine-tuned decisions, according to FICO.
"With FICO 8 score, FICO scientists were allowed for the first time to break the blueprint of our original FICO scoring algorithm," Jason Sprenger, a FICO spokesman, told Credit.com via email. That creates "a segmentation that rendered significantly more predictive credit scores than was possible before."
Compared with previous versions, FICO 8 goes easier on people who have missed payments on small debts under $100, which often include medical debts. The Commonwealth Fund estimates that 14 million Americans struggle with medical debts that they believe are erroneous, The Wall Street Journal reported, and the Federal Reserve estimates that half of all debts in collection arise from medical bills.
That means the new FICO scoring model could help millions of consumers improve their credit scores and reduce the amount of money they pay in interest.
"One of the good things in 8 is that debts under $100 are not going to have the same impact," says Hendricks, of PrivacyTimes. "I think it's safe to say a majority of those are medical debts."
On the other hand, FICO 8 considers people with high credit utilization rates to be somewhat higher credit risks than previous versions. That may hurt the credit scores of people who use relatively high levels of their available credit. "So if you carry high balances, you're probably going to lose a little more points than before," Quinn says.
The two tendencies may cancel each other out, Quinn says. Banks probably won't become any more loose with credit under the new model, and they probably won't lend to more people. Instead, lenders will subtly shift their definitions of which consumers qualify for which products.
Reading tea leaves
Most people haven't noticed any difference at all from FICO 8, and it's not because their credit histories are impervious to the changes. Rather, major lenders have been unusually slow to switch to the new scoring model.
In fact, the model was originally called FICO 08 because the company had planned to implement it in 2008. (Because of a lawsuit FICO brought against the Equifax credit bureau, the release was delayed until early 2009.) Now that it's going on four years since the original release date, FICO simply dropped the zero. Three years after the actual release, most major lenders still have yet to adopt it. And FICO 8 is entirely absent in the mortgage market.
But good luck getting confirmation of that fact from FICO, the credit bureaus or any major lenders, which use consumer data to make the scores but largely decline to tell the public what they do with it.
"There's no publicly available data on it," Hendricks says. "But that's my sense of it, that it has been slower."
Figuring out exactly what's happening with FICO 8 is an exercise akin to reading tea leaves. Try calling FICO to ask how implementation of FICO 8 is going, and they say you should call the credit bureaus. Call the bureaus, and they refer you to the banks. Call the banks, and they refuse to talk, saying their scoring models are proprietary.
The upshot: This is an industry that relies on consumers' data to function and that dictates the finances of millions of people. And yet it arguably operates with almost zero accountability to consumers.
"It's not as transparent as it needs to be," Hendricks says. "All this information should be filed publicly so we know what's going on. But we don't."
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If i dont pay then I have no insurance. Just another way for insurance companies to screw us over and charge us more !!
I think unless someone is considering extending an offer of credit, they have no business knowing your credit score or, for that matter, accessing your credit report. If I'm paying rent up front, you are not extending credit. I am paying you in advance for the right to rent your property. All a credit report and score proves is how I've paid my bills in the past. It guarantees you absolutely nothing.
Say I've always paid my bills on time, until I lose my job. Suddenly I can't pay my bills any more, including your rent. Kinda makes that stellar credit score a moot point, doesn't it? Or say I had problems paying my bills in the past, but now I have a good job and I've caught everything up. Why do I have to wait the required number of years for my credit report to reflect that?
We are required by law in most states to purchase auto insurance. But the price we pay should not be determined by a credit score. People only have good credit until negative information ends up on their report. These events are not a predictor of whether or not you will be a responsible employee or rental tenant. So why should they affect whether or not you can get a job or rent an apartment?
I have no idea what my score is and I don't care. I don't borrow money. If I can't afford it, I do without. They can make any rules they want. If I don't like it, I don't have to play the game.
Credit scores are a joke! You have people that go to work everyday to take care of themselves or their families only to get hurt or laid off from a job and lose everything. Everyone in this country is not born rich some of us have to work for everything. Try being laid off 3 times in less than 3 years. You have to decide whether to feed your family or pay a bill. The choice to make is obvious to me. I have read some of these responses and they are ridiculous. People are so judgmental until they are faced with the same hardships then you want someone to be sympathetic to you. Everyone with low credit scores are not bad people they deserve to be treated with respect like anyone else.
I don't care what kind of credit score the banks use, but what i can't understand is why banks don't do their own checking on some one.
The way I see this whole mess is what the devil does a credit score have to do with insurances of any kind, or a rental deal, or even my ability to do my job?
I guess insurance companies figure I'll wreck car to pay may insurance, or better yet, I'll total it to get out of paying for it? That's a stupid idea simply because I might get hurt or killed doing it. Ok, so homeowners insurance might believe I'd burn my house down to collect the insurance? Well the last time I heard arson is a crime and you can't collect if you commit a crime.
Let's look a rentals, so I'd not pay my rent and risk eviction and being homeless to pay my credit cards, no I wouldn't pay the credit cards first as they are unsecured debt.
Ok then, now for employment. I get the idea an employer might think I'd steal from then to pay my bills, no that is illegal too. Why would I risk the income I've got and risk going to jail too I think having a lot of debts would say to an employer I'd work overtime.
I wouldn't do anything illegal, so why use a credit on these three things. I can't see really any real good reasons to use a credit score at all except to charge more. Maybe the crime is the being committed against me by using this credit score. Maybe a credit score should be illegal to use for insurance, rentals, and employment.
F the American dream
it's been flawed for years, one of the flaws being it's almost impossible to get above a certain level (typically 720-750) without ever having a mortgage. since some people can never really afford a house until they're practically middle-aged even with a good income or financial history (particularly somewhere like LA or NYC), they're at an automatic disadvantage. also makes no sense that many people you pay your bills to never report a payment history, even if you are always on time. this is particularly a problem for things like your home telephone or utility, where if you never pay them, they will report it to the credit agencies and trash your scores, even though they will never report the positive payments. that should be illegal on the face of it. anyone that regularly reports a NEGATIVE credit history should also be required to report a POSITIVE payment history.
further, all businesses should have to fully disclose when they will run your credit (hard pull) and the potential impact to your credit score. I've opened a checking account, given them my SS# (required by law due to Patriot Act and so they can easily identify you without a bunch of red tape), and had them run my credit without telling me, negatively lowering my credit score at least 10 points and impacting my future ability to get approved for credit due to another inquiry. just for switching banks!! which is not credit on the face of it, unless the bank chooses to pay debits while you have insufficient funds (NSF), that they will charge you $30-40 for. all of this, even though I've had bank accounts since I was 10 and never had any history of any bad accounts they did this.
also consumer credit scoring doesn't accurately reflect DTI, since they have no idea what your income is. it only reflects what your debt is, in relation to your total credit "limits". if my income goes from 50,000 to 70,000, obviously I'll have a much better opportunity to be repaying my debts... this happened to me once in the past and yet my credit score stayed the same. not only can it keep your score down, but it can thereby impact your ability to get approved for a loan or credit card after getting a new job or raise. they will say, but you're already using 80% of your credit, and this may be true but that was based on a credit card limit you got approved for long ago, when your income was possibly much lower.
if you normally carry a balance around $500 on your credit card, and then your credit card company cuts your credit limit in half because of "economic factors" (i.e. Great Recession) this will dump your score several points. again not what people bargained for when they signed up or developed their spending and payment history. this happened to most people who had a credit card after the Congress-induced housing crisis.
I do have to say a 620 is not very good, so to the lady in the article too bad so sad. should've done better before trying to buy a house... like America needs more deadbeats buying houses? that's what got us into this mess in the first place. fix your credit through a history of good repayments and lowering your DTI
own home. husband gets hurt @ work responding to staff member being attacked by inmate. Workman's Comp takes 3 months to give us a paycheck. Pay mortgage or feed family? Hmmm.
Lost house & credit is now ruined.
And this is our fault how? We called workman's comp constantly only to be told "do not call my office again I will call you". I heard that arrogant ****** tell my husband that on speakerphone.
With late fees, penalties & mortgage the bank wanted approx $10,000 when it was all said & done to keep our house.
We have no car payment, no credit cards. But thanks to the short-sale on our house our credit scores have plummeted.
We also asked the bank if they would help us in anyway. NO! We paid $250,000 short sale: $175,000. Now. Why couldn't they work w/us & let us keep our house for that?! BECAUSE THEY PUNISH YOU FOR NOT PAYING!
DO NOT GET HURT AT WORK! WORKMAN'S COMP STICKS IT TO YOU TOO! SAD SAD SAD.
CONSIDER THE FOLLOWING,
I HAVE BOTH A CHECKING AND SAVINGS ACCOUNT AND LAST MONTH I RECEIVED ABOUT 40 CENTS IN INTEREST ON APPROX. $6,000 BECAUSE THE BANK PAYS ME WAY LESS THAN 1% IN INTEREST ON THE MONEY I HAVE ON DEPOSIT.
YET, IF I WISH TO USE THE BANKS MONEY BY GETTING A CREDIT CARD FROM THEM THEY WANT 12%-18% INTEREST ON PURCHASES AND MORE ON CASH ADVANCES.
THE DISCREPANCY BETWEEN WHAT THEY PAY THEIR CUSTOMERS IN INTEREST VERSUS WHAT THEY CHARGE THEIR CUSTOMERS IN INTEREST IS ABSOLUTELY CRIMINAL, YET THE NATIONS POLITICIANS LET THEM GET AWAY WITH IT, WHICH IS ALSO CRIMINAL.
I think credit scores should be eliminated all together! with the way this economy is going, only the rich will have any leverage with credit.
credit scores is just another way of widening the gap between the rich and the poor.
Are credit scores Discriminatory? I purchased my score from the big three, averaged 750 (FICO). I applied for a low interest loan to refinance my house the next week. Loan officer calls back within a few minutes. Mr Sparks, we cannot approve your loan because your credit score average is 555. How can this be, I just purchased my score and it was 750. I immediately called the credit reporting agency for an explanation. They simply used a different scoring model, which I had never heard of until then.Their explanation of the reasoning made no common sense. After spending a few restless days and nights I came to a conclusion of my own.(Discriminate) If they do not want to loan money to certain people, flag their name at the credit reporting agency to use lowest model and problem solved, no explanation.
How to slow down on the high rate of home foreclosure in the US. Since banks were bailed out at the start of this poor economy, and with14 million Americans out of work, due to lack of jobs. Help the poor Americans that are still in their homes, by having the banks that are holding these notes modify the loans to the depreciated value of the homes until the economy, and jobs get stabilized, the banks can afford to do this for America and its people. Banks received bailout help, so why shouldn’t American home owners . Let’s get America back on track and make America a stronger NATION AND ITS PEOPLE... THIS is not the total solution but it’s a damn good start..to slow down foreclosure.
My score is very good, but on my credit report negative factors were: 1. no mortgage --but why do I need a mortgage? The house has been paid for for 30 years.
2. No major credit cards--what are Visa and Mastercard anyway?.
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