2/11/2014 4:15 PM ET|
Why is the FICO score such a big deal?
It sounds like a character in a Disney movie, but FICO has no magical powers. But if your score is good, you can live happily ever after.
Call it the gatekeeper of credit. Its three digits can deny you a mortgage or establish your interest rate. And it's almost impossible to avoid in the lending world. That's because there's no credit score more trusted than the FICO credit score.
But there was a day when this ubiquitous rating wasn't around. Its creation was decades in the making by two scientists who believed computer-assisted credit evaluations could trump a handshake and a person's word. Now, 90 of the largest 100 U.S. financial institutions depend on the FICO credit score.
Its rise in the credit scoring world is not without controversy or stumbling blocks, however. In the beginning, many didn't buy into computer modeling and automation. And now, some challenge the score's dominance, while others question the score's accuracy.
"I get the idea of a credit score. It's a quick and dirty, easy way," says Pava Leyrer, president of Heritage National Mortgage in Michigan, who has seen the dawn of the FICO credit score over her 36-year career. "But I think there are some people who deserve a lower score and others who do the right thing in the wrong way and are penalized for it."
A long time coming
The FICO credit score wasn't hatched immediately after its parent company, Fair Isaac Corp., was founded in 1956 by William Fair and Earl Isaac. The pair had met a few years earlier while working at the Stanford Research Institute, developing ways to use computers to improve military decisions. They left Stanford under mysterious circumstances and decided to apply their research to the business world.
"Either they quit or got fired -- nobody really knows," says a source close to the Fair family who requested anonymity for security reasons. "But Bill Fair and Earl Isaac got good at computers at a time when very few people knew how to use them."
Working on a borrowed computer from Standard Oil of California during off-peak hours, Fair and Isaac began writing computer programs that could calculate scores that predicted behavior. Despite the innovation, their invention was slowly received.
They pitched the system to 50 major lenders in 1958. Only American Investment bought it. Montgomery Ward, the department store, followed five years later. And in 1970, the company signed up its first credit card issuer, Connecticut Bank and Trust. The company also developed a computer-automated system to process credit applications that nearly "killed the company," says the source.
"The idea of trusting a machine was pretty radical then," the source says.
Finally, Wells Fargo adopted the credit application software in 1972. The mid-'70s saw FICO expand into Europe as well as create its first score that predicted credit risk of existing customers for Wells Fargo.
"William Fair once said, 'We started the business in '56. By '75, we thought it would live,'" says the source.
In 1979, the company began working on a vision to create a general credit score generated from reports supplied by the major credit reporting bureaus. It would take 10 years before that vision came to fruition.
The score that changed it all
In the 1980s, FICO was creating custom scores for lenders based off credit bureau data. It also developed a score that helped prescreen potential borrowers from a consumer database at the credit bureaus for a lender's marketing efforts.
"That worked pretty well," says Anthony Sprauve, spokesman for myFICO.com, the consumer education division of FICO. "And then the light bulb went off: Can we take the credit report and from that, make a general credit risk score?"
FICO did that in 1989. The first general-purpose credit score based on Equifax credit reports debuted. Two years later, TransUnion signed up, and by 1991, the FICO credit score was available at all three credit reporting agencies.
"It was the first score that had transcended the three national credit bureaus," says Sprauve.
By the mid-'90s, after Fannie Mae and Freddie Mac's endorsements, the FICO credit score became the credit score of choice. The company now boasts that 90 percent of credit scores purchased by lenders come from FICO.
"It's critical in this industry," says John Stearns, a mortgage banker with American Fidelity Mortgage in Wisconsin. "For the most part, the scores are accurate, a good reflection of what has been going in a consumer's credit history."
FICO's legacy: The good, the bad and the ugly
FICO's dominance in the credit scoring industry isn't without its critics. Its greatest competition comes from the credit bureaus themselves, which provide the much-needed credit histories to produce the FICO score. In 2006, the three credit bureaus banded together and created a new credit score called the VantageScore as an alternative to the FICO score.
FICO struck back in 2007 with a lawsuit claiming a long list of infractions against VantageScore Solutions LLC and the three credit reporting bureaus. In court papers, FICO said its share of the credit scoring market had fallen a whopping 4 percentage points to 74 percent since VantageScore entered the scene. FICO eventually dropped the suit in 2011 after courts ruled in favor of VantageScore.
"FICO and the bureaus, the simplest way to describe it is as a cooperative relationship and a competitive relationship," says Sprauve, who noted that the credit bureaus sell the FICO scores to lenders, while FICO has no direct relationship with lenders. "We need the bureaus very much in partnership on the FICO score."
Consumer advocates and some in the lending industry have also questioned the accuracy of FICO credit scores. Leyrer notes that the FICO credit score leaves no room for nuance. For example, a person with a bankruptcy could have a similar score as someone who has many late payments, but no collections.
"I'll take a slow pay over a no pay every day," she says. "I've seen people with scores in the low 700s I would never lend a dime to. And I've seen people with scores in the 600s who I would loan my own money to."
The FICO credit score, among other credit scores, also has shown racial disparities, with minorities having lower overall scores, says Chi Chi Wu, an attorney at the National Consumer Law Center. She also notes that several studies show that many consumers' low scores are because of unexpected life events that affect their ability to pay bills. But once they get back on their feet, they are a good credit risk.
"The system doesn't do a good job distinguishing those folks from those who may have difficulty managing credit," she says.
Still, the FICO credit score isn't static. The latest FICO credit score is the eighth generation of the original score that Equifax first used in 1989. The company has also tailored the original for specific credit types, such as credit cards or auto loans. There are 53 FICO credit-risk scores being used by lenders today.
"We like to say that we never stop updating the models," says Sprauve. "We want to make sure the model best reflects current consumer habits, the kinds of credit products offered and any changes or improvements in credit bureau data."
The newest version ignores collections accounts under $100, de-emphasizes authorized user accounts and isolated late payments and is more sensitive to high credit card balances. The company is now looking into how loan modifications and natural disasters may affect consumers and their credit. A new, better iteration of the FICO credit score may come out of that research.
"They are scientists," says Wu. "They do think about these things."
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Trusted by Whom? The top 1% group which uses it to gouge and steal off the back of hard working Americans. We can vote 50 plus times to repeal the ACA. We can Protest Wall Street. There are folks being bused all across the Country to talk about Gun Laws and Abortion, but I have yet to see any group get together to talk about the biggest problem of all, Bogus Credit Scores. 99% of everyone agrees that they are a scam yet still it continues.
congratulations! Your FICO score is high. That tells me you had to BORROW ALOT OF MONEY IN YOUR LIFE...AND PAY IT BACK WITH ENOURMOUSLY INSANE INTEREST RATES.
I prefer cash....and no debt...and I achieved that by paying myself 10% on every purchase/expenditure I ever made since I was 24 years old..and I called it the "ME TAX"...which meant pay myself first, and if I could not afford the me tax...I could not buy what it is I wanted to buy.
That included every expense...so you can see how it got me on the road to saving money at an early age when you consider "expenses" included, food, power, water, car, etx..... By age 36, I was what many consider wealthy. don't get me wrong...it's a very hard thing to suddenly start....thus you should start it as early in life as you can...but the fruits of your good spending habits (and saving habits) start paying dividends in 5-7 years.
Oh the FICO score...I use to securitize MBS products back in the hey day (2003-2008; well I still do to be honest)...I **** u not back then the FICO score was more important that income.....haha....FICO still has a ton of importance but I think it is just a scam to charge more to the masses...I have a score of 803, but that dont mean if I go out and buy a mansion I wont go broke...I have been a good boy to this point but what if I lose my job? Actually I am losing my job....I am going to soon lose a very high paying job...I wont miss any house payment cuzz I have about a years savings in the bank and my mortgage pmt is very low...so to me those indicators should be #1, not some silly **** FICO score....but whatever its not going away so play the game or else you gonna pay!
A Russian Mathematician Markov says that in probability the events that did happen in the past does not matter. His powerful probability theory says that; is what an immediate past and current activity that determines the probability of outcomes in the feature, which is correct. People lost a job and fell on hard times. That was the past. What matters is how well they pickup the pieces and move forward that determines their remaining part of lives. FICO is an illegitimate math of collection agents.
A person's worthiness first and foremost is his/her standing in his/her community without lie, deception, cheating, theft, adultery, criminal act or behavior, respect to elders and very young. If you consider the above, the very people who are trying to analyze US public fail as they are the most corrupt, child porn chasers, often hanging around in brothels drunk and foul-mouth. You have such people running credit reporting. People who sponsored genocide in places like South Africa.
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