What Does FICO Really Mean? Will FICO Credit Reporting Software Have to Be Overhauled in the New Economy

Question

Many people don’t know that FICO is a company that provides a credit reporting software that is widely used. With so many people having major credit issues as a result of the financial crisis, the FICO credit reporting software, and other software used to issue credit, may need a rehaul for issuing new debt in the future.

I don’t know much about how scores are calculated, given that each software program has a unique way that it calculates credit scores. For example, auto loan underwriters use a different credit reporting software than the FICO software typically used by mortgage lenders when underwriting a mortgage loan.

My question is, will credit reporting software programs like FICO have to be rehauled to make adjustments for marks on the credit that have occurred as result of the financial crisis? Will certain items that have grossly affected credit scores prior to the crisis be given less weight when calculating credit scores in the new economy?

I don’t claim to be an expert on this topic, but I feel something has to be done about the way credit scores are calculated going into the future. In the wake of 2008, one of the worst financial crisis in U.S. history, my gut tells me that you can’t rely on traditional methods for calculating people’s credit scores anymore. The old rules don’t seem to apply in this new economy.

I’m sure some of you are experts on this topic, so please share your insight. Will popular credit reporting software such as FICO have to be rehauled for borrowers in the new economy?

Dion DePaoli · Answer

Corey, you are a lender, go get educated on this topic.  First, FICO is not a software, it is a math equation.  Second conventional loans are not based on credit score, they are based on credit history.  DU, LP & DO do not use score as an eligibility parameter, they use credit history.

Look up and read the FCRA (Fair Credit Reporting Act) and the FDCA (Fair Debt Collection Act) to get a handle on what can and can not be allocated to a credit report or debt collection.  Then read how FICO became a powerhouse in the market of credit scoring which was mainly from a push from congress to avoid discrimination.

All that said, FICO has become the "Kleenex" of credit profiles were the public believes that is "their" credit profile which is not true.  FICO calculates a score which consumers are familiar with but that is a FICO score and not necessarily a credit risk evaluation.  Everyone can blame an old settler by the name of Edwin who purportedly was the first "bad credit" account at a local store in the early days of the US.

In theory, you can have an 850 score and be denied a conventional loan.  The opposite is sort of true prior to some underwriting guidelines where you could have a 450 score and get a loan.

So does FICO need to change, nope, more consumers use it now more than ever to gauge their credit worthiness.  As a company, they have cornered the market of credit risk.

Further, having worked with credit over the last decade plus, the scoring model is pretty darn accurate.  What is confusing is the public/consumer doesn't understand what makes a score go up or down.

The recent strong influence of a number score in the housing market comes from sub prime loans and sub prime loans only.  DU, LP and DO cold still issue an "Approved Eligible" for a 450 score based on compensating income and asset factors or deny an 850 just the same.  A credit score is not what the public thinks it is or is marketed to the public.  A credit score is a rumor about you in the other room, which you don't get to walk in to.  Additionally, your credit history, is what it is, if you were late, you were late, if you have over extended credit, you have over extended credit.  They are not the same thing.

At the end of the day, FICO does work well and they modify and patent their math equation, which is secret and proprietary very often.  The public is who drags behind in thier understanding of what makes up a score and how certain things impact a score.  For the record, that is sort of the point, if the consumer knew the ins and outs, they could rig the game.  Regardless of what a credit repair specialist tells you, is a "known" fact, it becomes harder and harder as time goes on and data from the consumer population becomes more and more available to trick the system.  Which is more proof that it does a good job.  That said, if you extend credit and you ONLY look at a score, you are lazy and are likely to get burnt by the consumer trying to rig the game.

Steve Babiak · Answer

Change the metric however you want.  Deadbeats will still be deadbeats, and low risk borrowers will be low risk borrowers.  Or to quote Shakespeare "A rose by any other name is still a rose."

You make this sound quite like those people who think it is wonderful to give a trophy for finishing in tenth place in a ten team league.  Does finishing last merit a trophy?!?

Change the scale, measure some other parameters, and you'll still see clear differences in people.  When I get a tenant application with a 450 credit score, the report details clearly show that they were deserving of that abominable score - and they aren't getting to be my tenant.  In the future your scoring model might give them a 1000 - but in that same new system of scoring, I'll be expecting something like a 1500 minimum ...

James H. · Answer

I'm not an expert, but I don't see why the reporting method would need to  change. First, the poop didn't hit the fan because credit scores were artificially inflated - the poop hit the fan because lenders were lending to people with bad credit and lending too much money to everyone.

If you had great credit and bit the dust because you borrowed too much, it's my opinion your credit rating should be lowered and it should be harder to get credit.

Just because a lot of people messed up, doesn't mean the metric by which lending risk is evaluated should be changed. It means the decisions made based on the given metric should be changed.

I know this isn't the best example, but if you fall off a cliff, you don't try to change gravity, you stop walking on the edge of the cliff.

Jon Holdman · Answer

Please turn this conversation away from attacking each other and back to the question at hand or it will be removed.

Corey Dutton · Answer

Dion DePaoli why do you always try to make comments on the forum in a tone of trying to "one up" everyone. In every single one of your comments you are always trying to make it sound like you know more than everyone else on the forum. Not sure this tone is actually going to bring you any kind of business or clients. No one can really appreciate a "know it all..." Your novel-like comments are tiring...

Dion DePaoli · Answer

Corey Dutton, clearly reading is not a strong point for you, as the first sentence in my post:

"Corey, you are a lender, go get educated on this topic. First, FICO is not a software, it is a math equation."

So Brian Hoyt, it is what I was saying...because I actually said it! (typed technically)

Thus Corey you are wrong, it is not a company that provides software.  FICO provides and develops credit scoring models, which is math.

FICO website description of themselves:  "FICO is a leading provider of credit scoring, decision management, fraud detection and credit risk score services."  Didn't see "IT Company" in there did you?

In 1991, FICO credit bureau risk scores made available at all three major US credit reporting agencies — BEACONsm at Equifax, EMPIRICA® at Trans Union, and the Experian/FICO model at Experian.

So when you see an agency score, it is one of the scoring models above, which are NOT all "FICO" as a single score, which is at Experian.  The agencies have different algorithms and use different data from the data they collect.   So clearly NOT semantics.

FICO as a company developed the proprietary algorithms for the agencies along with many other companies such as Montgomery Ward, one of its first most known clients.  FICO is not the only credit score system in the market or industry.  VantageScore is a credit scoring model developed in unison by all three credit agencies where they use the same metrics and calcs amongst themselves, that model delivers back a completely different score and indication scale ranging from 501 to 990 with letter grades A to F unlike FICO built models which is 300 to 850.  Any consumer can go and purchase a VantageScore report right now on Experian's website.

You wrote:  "I don't claim to be an expert on this topic, but I feel something has to be done about the way credit scores are calculated going into the future. In the wake of 2008, one of the worst financial crisis in U.S. history, my gut tells me that you can't rely on traditional methods for calculating people's credit scores anymore. The old rules don't seem to apply in this new economy."

Well if your not an expert, why do you feel something has to be done??  Your gut is not doing you any favors.  Credit scoring is an ever evolving industry both for consumer and business credit and it has been since the early 1940's.  Databases of data have been evolving and thus the use of different data points in collusion with previous collected data must evolve.  Credit modeling did not give way to the mortgage crisis in America, risk modeling did of which credit is only one part but also includes income, equity and assets, etc.

"The old rules don't seem to apply in this new economy"  What do you have to base this on?  Clearly you have not spent the time to understand what credit is and how it works, which is ironic since as a lender you extend credit.

Lastly you can act like a 12 year old when you are corrected or you can take your medicine like an adult.  Attempting to mock a person who seemingly and clearly knows more about a topic than you is what you would do on a school bus.  And apparently, that just backfired in your face too.

Corey Dutton · Answer

But I guess I need to go and get "educated" on this topic, according to Dion. Even though I wrote, "I don't claim to be an expert on this topic."

Obviously Dion is an "expert" on this topic...;)

James H. · Answer

FICO is a company. I believe what Dion DePaoli was saying (forgive me Dion if I misinterpret) was that the score itself was derived from an equation, not software. That being said, software is simply a bunch of math equations and I would imagine that there is a software interface that is used to show the results of the equations.

Pretty much a semantics thing.

Corey Dutton · Answer

FICO is not a math equation. There you are wrong. From Wiki:

"A pioneer credit score COMPANY, FICO was founded in 1956 as Fair, Isaac and Company by engineer Bill Fair and mathematician Earl Isaac.[2] FICO was first headquartered in San Rafael, CA, United States.[3]

FICO is a public company that provides analytics and decision making services—including credit scoring[1]—intended to help financial services companies make complex, high-volume decisions.[

Before you start getting snappy, do your OWN homework....

James H. · Answer

I am not placing blame or responsibility on any party in the lending/borrowing game.

Don't borrow OR lend too much if you don't want to loose your ass(ets).

That being said - as you stated, the borrower will borrow up to the nose and more if allowed, regarding the general public.

Nobody looks at their own credit score and says to themselves, "I dont want to borrow that money because my FICO is too low which means my risk of defaulting is high."

So in regards to who holds responsibility for the appropriate evaluation of the FICO, I can say that I think that belongs to the lender.

The premise of my argument is based on the credit score being the objective parameter and all risk based decisions revolving around it being what should change. I understand the FICO score is not 100 percent objective, but I would say it is more stable than everchanging lending policies based on the same score depending on the place and time.

What Does FICO Really Mean? Will FICO Credit Reporting Software Have to Be Overhauled in the New Economy

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