FICO Expanding Number Of Bad Credit Categories, Overall Score Fluctuations Expected

Besides closing the authorized user piggyback loophole, another change in the new FICO score system is that the number of categories for risky debtors will go from two to four, reports the News&Observer. There will remain 8 categories for good credit, brining the total number of rankings to 12.

We suspect Fair Issac will use this expansion of the FICO system to also rejigger the formulas for many of the credit sectors. Expect your score to rise or fall by a few points in September, and probably fall pretty drastically if you have poor or little credit history.

A few points might not sound like much but under the current system, a score of 620 to 659 could pay $163 more monthly for a 30 year mortgage, a difference of $58,680 over the life of the loan.

Little information is available about the new FICO system, or even the old one, because Fair Issac is a private company and doesn’t want anyone stealing their methods. Instead, they’re allowed to keep everything in black box and have a major influence on the US economy. Outright regulation may not be the answer, but how about turning that black box into a glass one?

Only one of the credit bureaus is set to be using FICO 08 come September, the company has set the other two will switch over mid-2008. No doubt they’ll be guinea-piggying that bureau before switching over the others. Characteristically, the company declined to say which credit bureau it would be.

Your FICO credit score could change under new rules [News&Observer]
(Photo: Getty)

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  1. humphrmi says:

    another change in the new FICO score system is that the number of categories for risky debtors will go from four to two

    Note that, according to the article, the number of categories for risky debtors will go from two to four, not the other way around.

  2. Doc Benway says:

    In the immortal words of Margaret Cho, “What is ASSMASTER?”. And the answer is FICO.

  3. Yogambo says:

    It is infuriating that some private company can do something that has such tremendous impact on the lives of the citizenry of this fine nation without one ounce of oversight. First they axe many wives and kids that are doing their darndest to build some credit. They they come up with this new forumla. They say this is all good for us or what was there before was “bad.” But we have zero choice, zero voice. We just have to sit here and take it. Sounds a bit like communism.

  4. TomK says:

    I remember hearing in school about this great idea called democracy. The idea is that it moves power from monied interests to the people. People can vote for representatives who will represent them to protect them from the authority of the monied interests. This way everyone, not just the monied interests, can have a good standard of living.

    I wish we had a democracy here in America.

  5. Notsewfast says:

    @Yogambo:
    It actually sounds nothing like communism. It does however sound like fascism, the polar opposite of communism.

  6. Lula Mae Broadway says:

    @TomK: Democracy = Great idea! If only it didn’t require people to read and to vote.

  7. Sudonum says:

    @TomK:
    I remember hearing about this thing called democracy in school as well. I don’t remember hearing anything about “it moves power from monied (sic) interests to the people”. I do remember hearing about how it provided citizens certain rights, such as unreasonable searches, habeus corpus, and others. I long for those days.
    @Yogambo:
    I am not supporting FICO by any means, but last I heard you did have a choice, pay cash for everything and don’t borrow money.

  8. The Bigger Unit says:

    Yeah. Democracy. It got Bush elected for 8 years.*

    *This is not an endorsement for communism.

  9. bohemian says:

    Does anyone know if FICO is used in Europe or is this just a US & Canada phenomenon?

    The sweet lure of national healthcare, workers rights, mandatory sick leave and three week vacations is making Europe sound more and more appealing.

  10. JustAGuy2 says:

    Remember, you aren’t the customer for FICO scores – lenders are. So long as they are happy with the score as a tool for making lending decisions, and so long as the scores don’t violate fair lending provisions (i.e. the formula has a provision that says IF race=black THEN Reduce score 50 points), they’re free to do what they want. They provide a service to lenders – if the scores cease to be a good predictor of defaults (which is their purpose, after all), lenders will demand changes, or stop using it.

    Interestingly enough, Capital One has long focused much of their business model on having (what they view as) better models than FICO – targeting customers who (in Cap One’s view) are less likely to default than their FICO score would indicate, and avoiding borrowers who (again, in Cap One’s view) are more risky than their FICOs would indicate.

    BTW, the article needs an additional piece of information – to understand how much the impact of a lower score is, we need to know the amount of the mortgage – if a low-score borrower would pay $163/month extra on a $10MM mortgage, that really isn’t a big deal. If it’s a $50k mortgage, it really is.

  11. yg17 says:

    @bohemian: Is it even used in Canada? I thought it was a US only thing (much like paying for healthcare is…..)

  12. a_nony_mouse says:

    @TOMK

    ::glancing at my copy of the U.S. Constitution::

    can you point out the part about the inalienable right to borrow from private companies at the lowest rate? I can’t seem to find that section…

  13. bohemian says:

    There seems to be some sort of privacy violation going on with Fair Issac. Since “I” never established a relationship with these clowns who are they to dig into my private data. It also raises the next question, who is giving this private data about me/you and did they have my permission to give it to someone without my permission.

    I think the key to this and many of the other customer tracking and ID theft issues is to make it so nobody can give away information about you without your explicit information.

    You should also have the option to “opt out” of Fair Issac, just like you can opt out of telemarketing calls. Some might think that only those with bad credit would opt out, but there are plenty of people annoyed by how Fair Issac operates who would opt out anyway. Enough people doing this might collapse their validity.

  14. rhombopteryx says:

    @bohemian:

    I agree with your yearning for privacy but when the Fair Credit Reporting Act ALLOWS credit reporters to report your credit info to agencies, and doesn’t care one way or another whether you “permitted” them to share or not – well, then its not really so much a violation of a law. The problem with the whole credit reporting industry and the idea of “privacy” is that 2 different sides see the info – you, the borrower AND them, the lender. You aren’t exactly borrowing in the dark at night in the bedroom with your blinds closed. The lender knows about it too.

  15. Steel_Pelican says:

    @a_nony_mouse: We don’t have a legal right to the lowest rate, but we have a right to fairness. The federal government has protected this right to fairness through establishments like the Federal Reserve, and the FDCPA.

    Without transparency in the FICO algorithm, we have no way of knowing we’re being treated fairly, and therefore can’t seek recourse for unfair treatment.

  16. balthisar says:

    The US is intentionally not a democracy. It keeps stupid, populist idiots like Hugo Chavez from coming into power because we’re all pissy about something one day. Thank God or Og or Dog that we’re not a democracy, but a republic.

    Fair-Isaac has nothing to do with privacy other than their duty to protect. When you agree to credit transactions, you agree explicitly (look at your terms of service) that your data can be reported. When you apply for new credit, you agree that your history will be checked. It’s simple. You’re not Fair-Isaac’s customer; credit granting institutions are.

    Riding on “authorized users” has always pissed me off, and its about time this is being changed, too. Why the hell should some asshole get a good credit score just because the card belongs to his father?

  17. Malethos says:

    @Steel_Pelican:

    Fair Isaacs provides a scoring tool which the credit bureaus use to convert the contents of your credit report into a number. They claim that this number corelates with the risk of extending credit to you. The banks believe that this number works to minimize risk. So long as this number does not consider factors such as race, sex, ethnicity, etc. Fair Isaacs is completley within their rights to keep it confidential. Its how they make their money after all.

    If you have objections to it, come up with an open scoring tool that works as well or better than the FICO score.

  18. hustler says:

    @Steel_Pelican: yes, but in this great nation we have a president, who has the power to veto anything that is not good for his “beyond wealthy” constituents.

  19. yg17 says:

    @Malethos: Thats the thing. How do we know it doesn’t take factors such as race, sex, ethnicity, etc. into account?

  20. catnapped says:

    @Malethos: And you have proof that Far Issac doesn’t discriminate based on race, sex, ethnicity, etc. because… they said so?

  21. Noah_Bodie says:

    Experian is rumored to be the early adopter.
    [www.baltimoresun.com],0,2786199.column?coll=bal_business_investing_util

    FICO serves the consumer, and in this case that’s lenders. Lenders demanded this, and FICO responded. Had FICO not done this, some lenders would start availing themselves of Vantage scoring, some other scoring system, or an inhouse scoring system. American Express already uses an inhouse scoring system.

    I’m not a fan of this change FICO is making, for a number of reasons–not the least of which is they know it’s going to adversely affect millions of consumers–but it could get a lot worse if one suddenly had to worry about 5 different scores for each of the 3 credit reporting agencies.
    [insurancenewsnet.com]
    [investors.fairisaac.com]

    I cannot seriously consider the problem of renting AU TLs to be so widespread that it represents the majority of AU accounts. I’d be shocked if 10 percent of AU TLs were rented. Probably more like 1-2 percent, but we’ll likely never know.

    We will however learn, over a period of years, just how many innocent consumers who are husband and wife got screwed by FICO when their FICO scores drop significantly. It will be in the millions and maybe in the tens of millions.

    For the moment let’s assume that FICO scoring is blind to race, sex, skin color, religion, etc. Many factors which contribute to one’s FICO score are far from color blind.

    I’m just finishing up reading “The Two Income Trap”, and I commend it to all. Professor Elizabeth Warren, one of the authors, is the Harvard Law Professor who appeared in “Maxed Out”. A number of practices, which are flagrant racial discrimination, are cited. From the stats showing predatory lenders target higher income blacks more than lower income whites, to sworn statements by a Citibank official that she regularly adds on fees for minority applicants.

  22. Noah_Bodie says:

    Baltimore Sun link got chopped. Here it is in tinyurl form.
    [tinyurl.com]

  23. digitalgimpus says:

    I can’t see how these guys aren’t considered a monopoly. They control the finances of every individual in the US.

    And if you want to know your score, you must pay… for a number… that describes you.

  24. JustAGuy2 says:

    @raccettura:

    They aren’t a monopoly, since (as Noah_Bodie notes above) lenders can use other scoring systems, or build their own in-house scoring system. Again, we aren’t the customers here, the lenders are.

  25. Noah_Bodie says:

    FICO effectively has a monopoly on scoring, so the consumer (lenders) pay a premium relative to what they perhaps should pay. However, the consumers, which are multi-billion dollar banks, aren’t happy about it, and eventually I suspect they’ll have their way and there will be a myriad of scoring systems.

    This will be good for the consumer (lenders), but a broad group of American citizens will get royally screwed–even more than we already are by lenders. Everyone from the working poor to some at the upper limit of the income bracket are going to get hosed.

    Forget about a disappearing middle class or an income gap that’s growing wider. We’re talking Serfs and Lords.

    There are only potential bright spots which could save us.

    1) A federal usury law in which the max rate is tied to inflation or prime.
    2) Banks move very S-L-O-O-O-O-O-O-O-O-O-O-O-W when it comes to IT or any other process changes. They want to be danged certain the change will behave as advertised. Thus far, no one appears to have the confidence that Vantage or any other scoring system will deliver as many or more subprimes as compared to FICO. AMEX is the one exception of which I’m aware, and remember that AMEX issued it’s first card in 1958. They’ve been at this game for a while.

  26. ry81984 says:

    If FICO scores are so important, then we should have our government regulate them. Having a private company with so much power is not good for anyone. A private company does not have to be accountable to their customers, technically the government has to be accountable to us.

  27. cabedrgn says:

    Its not necessarily the lending side that bugs me about this but the people it will affect moving into apartment complexes and jobs. A *lot* of companies use credit reporting which isn’t always a good indicator of how hard/good a person will work (example, my credit was wrecked due to my ex-wife and my stupidity but almost prevented me from getting a job as told to me by the HR department of my last company, luckily they gave me a shot and I turned out to be one of their best employees). Same thing for housing, my credit all but pushed me into a bad area because none of the local apartments would touch me thanks to my bad credit (though it had no repos or foreclosures on it). A lot of utilities check credit as well.

    I can understand denying people for credit that they don’t really need but when it comes to a place to live or electricity or a job so they can pay their debts.

    Of course this leads to another argument about housing, utilities and jobs credit checking but gets a little off topic for this discussion.

  28. JustAGuy2 says:

    @ry81984:

    The company _is_ accountable to the customers: lenders. Again, consumers aren’t the customers of the credit services.

  29. FLConsumer says:

    Don’t like the system? Since it’s not gov’t run, the best thing you can do is create a new system. If you could come up with a system that’s better than the current one, and it less expensive, there’s a good chance the industry would take a look at it and possibly adopt it.