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.