The rollout of the long-awaited update to Fair Isaac’s popular FICO credit scoring model was finally announced on Jan. 29, but it will likely take some before the changes have a real impact.
The new FICO scoring model is designed to more accurately forecast borrower behavior — providing “up to twice the improvement in predictive power compared with previous revisions to the model,” according to the press release. That should both enable lenders to further reduce losses from existing borrowers who are unable to pay and to lend to more profitable consumers going forward.
It will also help lenders protect against abuse through “piggybacking” — when a consumer with bad credit attempts to boost their credit score by becoming an authorized user on the credit card account of a borrower with good credit — while still allowing for legitimate uses of this technique, such as when parents add their child as an authorized user to give her credit history a good start.
Rollout plans still unclear
Officially dubbed “FICO Risk Score, Classic 08,” but more commonly known as “FICO 08,” the model will first be offered to businesses by the credit bureau TransUnion. Equifax is expected to adopt the model during the second quarter, while Experian has not yet announced its plans. When reached for added information on timing of its FICO 08 adoption, Experian declined to comment amid pending litigation.
Under the new scoring model, FICO says lenders may be able to improve their “risk prediction” for key consumer groups. Those groups include borrowers who have limited credit experience (due to having either few accounts or “young” credit histories), consumers who are opening a new account and borrowers with negative items on their credit histories. Due to its model improvements, Fair Isaac sees FICO 08 improving the accuracy of lending decisions by up to 15 percent, according to a company press release.
Working on piggybacking
As its dated name might suggest, FICO 08 has been a long time coming. The revision was originally set to debut back in 2007. However, “implementation of the model was delayed due to lenders’ deep concern about the growth of illicit ‘piggybacking’ of credit card accounts,” Ethan Dornhelm, Fair Isaac’s senior scientist of scoring solutions, says via e-mail.
While innocent piggybacking has existed for some time, a few years ago, private “credit repair” companies sprung up to take advantage of the practice. For a fee, they would pair bad credit with good, adding bad credit consumers as authorized users on accounts of clients with good credit. Dornhelm explains that this development led to the first delay in June 2007, when Fair Isaac decided to remove authorized user accounts from consideration in the FICO 08 model. “This required new analytic work on the scoring model that took a few months to complete,” he says.
However, during subsequent discussions, major lenders and regulators expressed a desire for FICO scores to continue considering authorized user information for spouses.
That led to the second delay of FICO 08 in July 2008, when, Dornhelm says, Fair Isaac scientists found a method to prevent “credit repair piggybacking” while still permitting legitimate use of authorized user accounts. Although its introduction caused FICO 08 to again be delayed by several months, “this solution supports lenders’ compliance with federal regulations without adding new requirements for lenders to adopt the new score, to the relief of both major lenders and banking regulators,” he says.
Complicating things somewhat is the fact that the three major credit bureaus, who once relied on FICO to help create credit scores, launched a competitive scoring product known as VantageScore in March 2006. In response, FICO sued the credit bureaus, filing an antitrust lawsuit in October 2006. The suit against Equifax was dropped in June 2008. At that time, the companies said they were working on the FICO 08 model for Equifax customers. Despite having one fewer target, Fair Isaac said it planned to continue to pursue the suit.
No major surprises
Borrowers shouldn’t expect any major surprises from FICO 08.
We certainly are encouraging lenders to migrate to using FICO 08 as soon as possible …
|— Ethan Dornhelm |
Fair Isaac Corp.
Consumers can expect FICO 08 to play a role in their borrowing once lenders begin using the new model. With no precise date set for lenders to collectively switch to FICO 08, the timing of adoption “varies widely,” Dornhelm says. “We certainly are encouraging lenders to migrate to using FICO 08 as soon as possible and are providing our expertise and support to our clients to facilitate this transition,” he says.
Under FICO 08, borrowers’ credit scores will continue to range from 300 to 850, with a higher number indicating a lower credit risk to lenders. FICO 08 will continue to incorporate score reason codes, minimum scoring criteria and inquiry treatment as before.
Some borrowers could even get a small bump from the new model. Fair Isaac says that the new scoring model will focus less on minor slipups, with collections amounts that originally totaled less than $100 no longer included in the score’s calculation.
Overall, the new scoring model will emphasize both length and breadth of consumer borrowing. According to Dornhelm’s e-mail, “As such, a consumer who has lengthy experience with a mix of both revolving (credit cards) and installment (auto loan, student loan, etc.) accounts that they have paid on time is likely to be viewed more favorably by FICO 08 than a consumer utilizing only a single type of credit account.” Also, he says that a consumer with a relatively large number of open accounts that are in good standing will likely be viewed more favorably by the new scoring model than a consumer with only a few active accounts that she has been paying regularly on time.
Scoring for auto, credit cards
Additionally, TransUnion says beginning in April it will introduce two industry-specific versions of FICO Risk Score Classic 08. They will be offered to firms that provide auto financing and bank cards to consumers.