FICO’s new businesses

By Felix Salmon
February 20, 2010
sleazily shilled by Ben Stein is not actually a FICO score at all, and therefore even more useless than I'd thought. I also learned about their new Credit Capacity Index -- a pretty useful tool, I think, which tells banks not how likely someone is to default on their present debt load, but rather how likely they are to default if you extend even more credit to them.


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The FICO people invited me to a press dinner on Thursday evening, where I learned quite a bit about their credit-scoring system — including the fact that the “free” credit score being sleazily shilled by Ben Stein is not actually a FICO score at all, and therefore even more useless than I’d thought. I also learned about their new Credit Capacity Index — a pretty useful tool, I think, which tells banks not how likely someone is to default on their present debt load, but rather how likely they are to default if you extend even more credit to them.

The bulk of my conversation with CEO Mark Greene, however, was about the way in which FICO scores are being made available to individuals. If you go to FICO’s consumer site, myFICO, you’ll be bombarded with offers for products like ScoreWatch ($100/year), Quarterly Monitoring ($50/year), and even Suze Orman’s FICO Kit Platinum (a one-off $50; there doesn’t seem to be a cheaper Gold or Silver version).

If you hunt hard enough on the website, you can find some useful free information on what goes into your FICO score, what doesn’t go into your FICO score, and how to improve your score. Here’s how that last page kicks off:

It’s important to note that raising your FICO credit score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.

That’s kinda funny, because the losing-weight analogy is exactly the one I used when talking to Greene. If somebody is unhealthily overweight, then yes they do need to lose weight — primarily as a means to the end of becoming healthier. But it’s not a good idea to weigh yourself too frequently, especially if you end up doing unhealthy things in an attempt to lose as much weight as possible as quickly as possible.

Credit scores are similar, in my view: if you increase your overall financial health, by doing things like spending less than you earn and paying down your debt, your credit score will naturally rise. And it’s certainly a good idea to look at your credit report once a year, by visiting annualcreditreport.com and getting it for free, to make sure that there’s nothing factually untrue on it. For the overwhelming majority of consumers, that annual free credit-report download is all they should ever need or want when it comes to these matters.

But myFICO doesn’t seem to think that way:

You can get 1 credit report from each of the three major credit bureaus (TransUnion, Equifax, and Experian) once every 12 months from annualcreditreport.com. However, this site doesn’t provide credit scores, or more specifically FICO® scores.

What FICO’s saying here is true, as far as it goes: your annual free credit report does not include your FICO score. But the point worth bearing in mind here is that there’s really nothing that you can do with your FICO score once you’ve got it. If there’s a factual issue with your credit report, you can begin the long and arduous process of appealing it. But if the facts on your credit report are right, the FICO score is just something which drops out once you run those facts through the FICO computer algorithm.

Essentially, it’s very hard indeed to imagine a consumer who would get so much value out of knowing their FICO score — over and above the value they get from their free annual credit report — that they would be well advised to pay upwards of $15.95 to get it. All those consumer-facing FICO products might do wonders for FICO’s revenues (or they might not, I didn’t ask Green about that), but I don’t think they’re good for consumers at all.

So I’m glad that FICO is looking at another way of getting credit scores to consumers: a plugin for online banking sites. This is already being trialled by a handful of institutions: when you log in to your online bank account, a little box in the corner of the screen shows you what your FICO score is. Click on the box, and you’ll get useful and customized free information about how you might be able to improve that score; your bank will also probably try to upsell you some service or other. But for most users, this feature will simply be a useful and valuable aspect of their overall online-banking experience, which might even make them feel more well-disposed towards their bank.

There’s another thing that Greene said that FICO was working on, too: responsibility metrics. FICO officially frowns on the fact that employers, landlords, and the like obtain access to individuals’ credit scores and use those scores as a proxy for that person’s general moral upstandingness. After all, that’s not what FICO scores are designed to do. But at the same time, there is a correlation there: those landlords and employers might be acting in a sleazy manner, but they’re also acting rationally.

I’m a little worried about FICO getting into the business of trying to quantify moral probity: it seems to be a business rife with massive potential pitfalls. But then again, I suppose that FICO doesn’t need to worry about its own Rectitude Rating. It’s a public company, its only obligation is to try to make money for shareholders, right?

Still, if FICO wants to create a new product, I’ve got a great idea for them. It turns out that your FICO score is only an indicator of the probability that you’re going to default: it says nothing at all about the amount of money that banks are likely to be able to recover from you in the event that you do default. If FICO started selling a recovery-given-default rating alongside its main FICO rating, that would surely be even more valuable to banks than the credit capacity rating. After all, if a bank lends money only to people who were ultimately likely to repay their debt in full after going into default, it will end up making much more money than a bank which lends to people with the same probability of default but who are much more prone, in such a situation, to just walk away from their debts and never repay them.

It seems to me that a recovery rating would be a much more obvious and profitable business for FICO than either morality ratings or the consumer products that they’re pushing on their myFICO website. And would make the company much less disliked among consumer advocates, too. But maybe they don’t have the data necessary to put a recovery rating together.

11 comments

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Some years back, I shelled out $45 for a three-report set (Experian, TransUnion, Equifax). It was useful to know what needed to be cleaned up. However, what one agency regarded as a negative was completely ignored by the other two, and another was just bizarre. I wondered how often those with lower ratings than mine were getting screwed through simple caprice.

Posted by Mega | Report as abusive

If you’re planning to borrow for an auto purchase it’s helpful to know if you’re credit-worthy ahead of time so you can possibly decide to postpone the purchase while you increase your score by paying on time for a while or decreasing debt. Any auto salesman will tell you that many people come in to buy with no idea what a credit score even is or what kind of loan they should be able to qualify for.

Posted by JonHocut | Report as abusive

Better yet just ask a sales rep what kind of financing you qualify for and while they are looking it up inquire as to what your credit score comes up as.

Maybe cheapness is a sense … -J. Seinfeld

Posted by wolphkaat | Report as abusive

Good advice, Felix. I have never known my credit score, and have no particular desire to. On those rare occasions when I need credit, it doesn’t seem to be an issue, and it doesn’t even seem like anyone puts in a request for it.

I know many people who treat their (FICO) credit score as a measure of their self-image, or as a competition to see who can have the “best” score. These attitudes are largely encouraged by the financial press, so it’s great to see someone finally questioning why we need to know it at all.

Posted by Curmudgeon | Report as abusive

Any credit analysis which is based exclusively on one side of the balance sheet – the liability side, is bound to be flawed. FICO does exactly that.
If I tried that, I’d be an unemployed analyst very quickly.
Good job bringing this up, Felix.

Posted by oneupper | Report as abusive

Well, when I got my first mortgage in the late ’90s, not that long ago, I had to come up with documentation for -all- my income, -all- my assets, -all- my liabilities, -all- my bill payment records, the works. The current notion that all this is now dealt with by a single FICO score is just crazy.

Posted by MattF | Report as abusive

In re scoring, call the Creditkarma people, who are modeling and giving away a version of the FICO. I’d rather my credit union partnered with them than Fair Isaac, since the latter is to my mind suffers from the milktoast malevolence shared by all moderately incompetent monopolists.

In re analysis based solely on one side of the balance sheet, it’s worse than that: your FICO is based primarily on the history of a small subset of your income statement and on the current snapshot of a smallish corner of the liability portion of your balance sheet. If I were working for, say, Applied Underwriters as a statistical analyst (viz careerlink.com/0/4/7/2/po/004690f.htm) I would under no circumstances consider copying more than the tiniest, most obvious things from Fair Isaac.

Alas, precisely because Fair Isaac have been really great businesspeople, monopolizing this space and as noted expanding to new ones, people unfortunately do want to know their score. They also want to know all the stupid, inconsequential things that affect it. The sooner FICO dies a much-deserved death, the better, but until then, you want to max yours out. My current employer ran my FICO when I applied. ‘Nuf sed, hm?

Posted by wcw | Report as abusive

Felix –

I think your inability to see the uses of a FICO score comes from your lifestyle. You’re a proud renter, you’re not the type I would expect to be in the auto market in the near future, and I’d guess you’re the type of guy who, if he has a credit card, uses it only for the points and never carries a balance. And for that segment of the population, you’re largely correct.

It is also very tough to imagine paying for other companies’ scores, simply because at that point you’re limited to at most 10% of the market.

I don’t think its that hard to imagine a person for whom the FICO score (with the accompanying score simulator and comments) is worth $15, though. I’ve been that person several times over the past four years – when I bought my car, when I bought my house, when I was looking for a bar study loan, and when I was looking for a 0% credit card to transfer balances to.

That information lets you know what the market value of your debt is. It was empowering to talk to mortgage lenders knowing that the average person with my credit score had a 5.25% fixed rate. If you shop around by hiring a broker, it helps you know that he or she is honest (since there is an obvious moral hazard). If you shop around manually, it helps you know when you’ve done so enough (since you’ll generally be charged a hefty application fee to do so). If it saves you even an eighth of a point on your mortgage, its in the money.

Likewise, if you want a credit card, its really useful to know if the terms on the mailer you got are your market terms. (Especially since credit card companies are generally less willing to lend to people who seek out credit online, since it indicates desperation).

But with the comments and the score simulator that comes with the score, it also helps you reduce the cost of that debt by raising the score. It’ll tell you if you just need to wait for your accounts to be more mature – and you can save money by waiting to buy that house for another year. It’ll tell you if don’t have enough of a credit history to get a high score, and you can save money by getting a credit card for the points and demonstrating you can pay it down. Maybe it tells you that your score is being heavily weighed down by a maxed out credit card. (Which sounds obvious, except that Fair Isaac doesn’t collect interest rate data, so you can be penalized for paying down a non-maxed, higher rate card over a maxed out, lower rate card.)

Now, I’ll be the first to admit that the advice isn’t always terribly specific, but its worth $50 a year if you’re planning one of those purchases. And if nothing else, dropping your credit score and comments in the forums on Myfico.com can do a world of good.

Posted by AnonymousChef | Report as abusive

CreditKarma is NOT giving away a “version of the FICO score” as suggested in the comments. They’re giving away the TransRisk Score, which is a competing score built by TransUnion.

What I found to be concerning is the assertion that Greene makes that employers are using FICO scores. All three of the credit bureaus have gone on record, time and time again, as saying that they do NOT provide a FICO score or any other score along with the reports they sell for employment screening.

“FICO officially frowns on the fact that employers, landlords, and the like obtain access to individuals’ credit scores and use those scores as a proxy for that person’s general moral upstandingness.”

Posted by Ulz | Report as abusive

Some Guy Told Me.

In 2008, when I asked FICO about its claim that employers use scores, a spokesman said that the company bases its claim on “anecdotal information gleaned from public sources such as published articles.”

Despite the consumer reporting agencies’ statements that they do not provide scores to employers, the agencies still claim that employers use scores. Media perpetuate and amplify the notion and scare the daylights out of consumers and legislators. Consumers buy the scores and legislators pass bills.

Here’s a quote from one of Experian’s vast array of websites:

“Credit scoring helps potential lenders, landlords, and employers quickly gauge an applicant’s credit history.”

Posted by GregFisher | Report as abusive