Fico: A credit score past its prime
Fico’s credit-scoring monopoly is facing new challenges, said Caroline Conway in the Financial Times. Created in 1989 by the data firm Fair, Isaac, and Co., the Fico score—which uses a set of credit variables to access risk along a scoring range from 300 to 850—“became central to U.S. mortgage lending in 1995, when Fannie Mae and Freddie Mac began mandating its use for mortgage-backed security underwriting.” Fannie and Freddie, federally chartered corporations that buy loans from banks, largely determine bank lending standards, so Fico quickly became “fully embedded in mortgage approvals.” Now the metric dominates other lending areas as well, but it leaves an estimated 53 million Americans without traditional credit. Competing models may finally be starting to gain traction. The three largest credit bureaus—Equifax, Experian, and TransUnion—“have been pursuing alternative credit data and analytics” that include factors such as rental and utility payments. Some of that data goes into the 15-year-old VantageScore, which has expanded credit access “to 40 million otherwise unscored individuals.” But it hasn’t yet ended Fico’s effective monopoly in mortgage lending.
Banks are beginning to look beyond the credit score, said Peter Rudegeair and AnnaMaria Andriotis in The Wall Street Journal. JPMorgan Chase, Wells Fargo, and Bancorp are among 10 banks that are starting to “factor in information from applicants’ checking or savings accounts at other financial institutions,” such as whether they ever bounced a check, to improve their chances at securing a credit card without having a credit score. Skeptics may consider it another “ploy to rope customers into onerous terms,” as some banks did with subprime loans before the 2008 financial crisis, said Brian Chappatta in Bloomberg.com. But I view it more optimistically: Big banks are finally recognizing the “credit invisible,” who are disproportionately Black and Hispanic Americans, and are “doing what they should have been doing long ago” to help them.
A major barrier to changes in credit scoring is that mortgage lending is based largely “on a formula that hasn’t changed much in two decades,” said Penelope Wang in Consumer Reports. While many consumers are now familiar with their credit scores through bank websites and credit information apps, often the Fico score you’ll get from those sites is much higher than your mortgage Fico. One homebuyer in Atlanta walked in to get a mortgage with what she thought was an excellent credit score of 760, only to find that her mortgage credit score was just 700. The old formula “doesn’t reflect some of the more consumerfriendly changes that have been introduced” over the years—for instance, dropping paid-off collections and counting medical debt less heavily—and so judges consumers more harshly.