I am going to attempt to simplify a VERY confusing topic. This will be an oversimplification really. If you want detals I have a white paper I would be glad to share with you that goes into great detail.
OK, here we go.
FICO scores are a numeric representation of the information in your credit files. The score,
always a three digit number, represents the odds of the consumer paying 90 days past due on
any obligation in the subsequent 24 months after scoring. This is commonly referred to as the
“performance definition” of the model, which is it’s stated design objective.
All of FICO’s credit bureau based risk scores are scaled differently but they will all fall within a
150-950 range. The higher the score the lower the risk posed by the consumer. The lower the
score the more elevated credit risk posed by the consumer. High scores almost always lead to
approvals with competitive rates and terms. Low scores often lead to credit denials or, at best,
approvals with punitive rates and terms.
FICO’s models are not built or influenced in any way by the credit bureaus. The credit bureaus
are simply distributors of FICO’s scores. They do not engineer, design or develop FICO’s scoring
models and they are not a part of the redevelopment efforts of FICO’s scores. Their influence is
limited to their data, which is used as development samples.
The FICO credit bureau scores are calculated by FICO’s scoring software. And, like most software
programs they must be redeveloped from time to time. FICO attempts to redevelop their scoring
software every few years, but that’s largely dependent on them being able to obtain new
development samples (two large sets of matched credit files 24 months apart) from their credit
bureau partners. This is often referred to as the development “snapshot.”
At this time, each of the three credit reporting agencies are supporting 3 generations of FICO’s
“classic” risk scoring system and 2 generations of their “NextGen” scoring system. That means
there are 15 FICO scores commercially available across Equifax, Experian and TransUnion. The
models that are the more commonly used are FICO’s classic models, BEACON at Equifax, FICO
Risk Score Classic at TransUnion and the Experian FICO Risk model at Experian.
Each of the available classic FICO risk scores comes with semi-customized industry specific
adjustors, commonly referred to as FICO “Industry Option” scores. These scores use the generic
FICO score as the base and then adjust that score, up or down, based on the consumer’s risk for a
specific loan type. There are five such industry option scoring models; FICO Mortgage, FICO
Auto, FICO Bankcard, FICO Installment Loan, and FICO Personal Finance. The industry option scores are meant to offer a more predictive evaluation of a consumer’s credit risk for a specific loan type. For example, bankcard issuers care about how consumers pay their auto loan obligations but they care more about how well consumers pay their bankcard obligations. As such, a bankcard issuer would likely use the bankcard FICO score.
An unintended byproduct of the industry option structure and periodic redevelopment schedule
is an ever growing number of scores still commercially available and used by lenders. When a
new model and its industry options are released and the credit bureaus choose to not turn off
older versions, it adds between 4 and 6 new scores to the market, per credit bureau. As of the
today, there were 49 FICO scores in production and being used by lenders.
The simple solution to this problem would be to simply force lenders to move their application
decision systems to newer scoring model versions by some future date so that older models can
be shut off. The problem is the exercise to move to newer versions would cost some lenders
millions of dollars and take many months, if not longer. And finally, the credit bureaus don’t have
an incentive to force lenders to move to new FICO scoring versions.
Keep in mind that not only are the credit bureaus the sole distributors of the FICO score but they
are also FICO’s most significant competitors because of VantageScore. Moving lenders to newer
FICO versions does nothing for the credit bureaus, but it does help FICO. Unfortunately, it’s up to
FICO to convince lenders to upgrade to their newest versions.
The result is there are 49 different FICO scores out there today.
Consumers have very few options when it comes to obtaining copies of their FICO scores. They
can purchase a FICO score based on TransUnion and Equifax data from FICO’s consumer website,
www.myFICO.com. They can also purchase their FICO score based on Equifax data directly from
Equifax on their consumer website. There is currently no option to obtain your FICO score based
on Experian data.
The FICO scores sold by both Equifax and myFICO are 1) not the most current versions commercially available and 2) the generic FICO score versions. Consumers have retail access to only two of their 49 different FICO scores.
Consumers can get their FICO scores, legitimately, under two other scenarios. The first is if the
consumer applies for a mortgage loan secured by 1 to 4 units of real property. Under that
scenario the party that arranges the loan must disclose the credit score/s as part of the “Notice
To The Home Loan Applicant” per the Fair Credit Reporting Act (“FCRA”).
The second scenario where consumers can get their FICO scores is if they’re used as the basis for
some sort of adverse decision by a lender. This right is conferred by the Dodd Frank Wall Street
Reform and Consumer Protection Act, which amended the FCRA to include language regarding
mandatory score disclosure as part of adverse action notices. If a score is used as a basis for a
declination or an adverse approval (an approval but with less attractive terms) then the lender
must proactively provide a copy of the score to the application as part of their adverse action
The Consumer Financial Protection Bureau (“CFPB”) recently reported that they believe the number of scores available to consumers via retail websites can cause confusion and that 20% of the time they can be materially different than the scores lenders are using to make decisions. This can feed consumer distrust of lenders, credit reports and credit scores.
The fact that there are so many FICO scores available to lenders and so few available to consumers (4% of the total) can also lead to consumer confusion because the scores that consumers are buying are also likely different than the scores lenders are using, albeit for more reasons that simply the lack of access.
© 2013 The Ulzheimer Group, LLC. Any reproduction or distribution without the express written consent of the author is forbidden