By Greg Fisher
2007

This is the real deal. The FICO credit score is the one that counts. "The One Lenders Use" (now the credit score "most lenders use"). The broad-based risk credit bureau score. THEE score.

A basic definition of the FICO credit report score

Three national credit bureaus have their own named version of the FICO credit score. Practically and technically speaking, since the inner-workings of the FICO are so secret, the only people who could know enough to render a definition would be at Fair Isaac, its creator. It is so fundamental, the honor of giving it goes to the holder of one of the greatest cash-cows in lending. See the myFICO.com glossary for these terms:

Credit bureau risk score

Credit score

FICO scores

So, a FICO score is a credit bureau risk score (also called a credit score).

The definitions section of the federal law that provides the rules and guidance for credit reporting does not contain a definition for credit score. However, the term is used in the law 56 times. Information in your "file" held by a "consumer reporting agency that compiles and maintains files on consumers on a nationwide basis–is used to assign you a ranking. That rank—a number from 300 to 850—represents the risk of lending money to you based solely on information in your file.

FICO score popularity and dominance

Equifax calls the FICO score the scoring model "most widely used" by lenders. Then again, Equifax tries to appease the rowdy public by saying that "the majority of scores fall within the 600s and 700s." That may be true, but a credit score chart from Fair Isaac itself also shows that a majority of FICO scores fall between 550 and 750. And the 700s and 800s contain a majority, too, for that matter.

Playing around with words and numbers like that, you could say that a majority of FICO scores fall within the range of the 300s to the 800s.

So, you people with a score in the 600s: You can just breathe a sigh of relief, eh? You're in the majority (with people in the 500s, 400s, and 300s, that is)! But, yours is below the average FICO credit score; Equifax forgot to mention that. There is a huge difference between the loan you can get at 600 and one you can get with a FICO score of 799.

Equi-"facts" aside, back to the omnipresence issue: The most widely used credit score. Equifax isn't the only one who uses that made-for-soundbite phrase. Need more proof of the FICO score's high market share? Just ask (search for "most widely used") PBS, BusinessWeek, TransUnion, the State of New York, the Washington Post, Consumers Union, ABC News, Franklin County, Ohio Treasurer Richard Cordray, The State of New Jersey, U.C. Berkeley, and the Federal Reserve.

And Trucks.com!

And just about anybody else making comments about credit scores. Now, that's publicity.

How do all these disparate people come up with the the same, exact words? And where do they get such an obscure statistic? Is there a Neilsen rating service for credit scores? Maybe it's from Fair Isaac, the "pioneers." They swear to it in congressional testimony. Actually, Fair Isaac says their FICO scores are the most widely used IN THE WORLD!

FICO score prevalence in mortgage lending

Fair Isaac claims that the FICO credit report score is used in 75% of mortgage loan originations. 75%? OK. Sounds reasonable, even though there is not much of anything published to back it up other than the writing of a bunch of lemmings. So, let's go with it.

But, before moving on, one more thing: In 2000, it was 75%. In 2001, it was 75%. 2002: 75%. In 2003, still 75%. 2005, yep, 75%. You would think that number would change. We are, after all, talking about a statistics company. Hasn't it gotten to 80 yet? Or is it 99%, and they just don't want to scare us with that omnipotence?

Good score. Good score. Good score.

So, what's a good FICO score, really?

More curves in the road ahead. Fair Isaac says one in the "mid-700s or higher" is a high score. On the other hand, Fair Isaac said 700 is "healthy." On the third hand, 600 seems to be an OK FICO score. Fair Isaac said, "Anything below 600 is considered someone who probably has credit problems that need to be addressed."

Having fun yet? Wait till you see The Bar.

FICO Score History and Histrionics

Fair Isaac puts it like this: "First general-purpose FICO score debuts--BEACON at Equifax. (1989)."

A decade passes. Fair Isaac (it's their score—and don't you forget it—they named it after themselves) says stuff like, "Fair, Isaac's job is not to tell you how to get a better score," "The terms of the our contract with the credit reporting agencies prevent either of us from disclosing scores without the other's permission" and "A lender does not have to disclose a score to a consumer, and it is our opinion that disclosing a consumer's score is not particularly helpful to that consumer." ⁽¹⁾

In 2001, they start selling consumers access to their rankings by releasing the Equifax FICO score, "BEACON." The TransUnion "EMPIRICA" score (now the "FICO Risk Score, Classic") followed in 2002, and Experian's FICO score (now the "Experian/Fair Isaac Risk Model") in 2003.

Today, a search engine page on the subject returns 117-million results.*

Going from super-secret to Super Bowl advertising, Fair Isaac did an about-face-- with myFICO.com (indeed, featuring the chattering Suze Orman). Yes, today, there's no reason to try to explain FICO credit scores better than the experts. Why take some journalist's paraphrase when you can go to the source?

What is the meaning of a FICO score? What does it predict?

Predictive analytics. That depends on who you talk to. Fair Isaac's web site says it isn't so much a credit rating as it is a ranking: "Classic FICO® risk scores rank-order consumers according to the likelihood that their credit obligations will be paid as expected."

The myFICO.com web site asks

"The median FICO score in the U.S. is 723. Where do you rank?"

So, on that continuum of 300 to 850, you have your special place, your score, and everybody else sits in relation to you.

Professor Michael E. Staten, Georgetown University says, "The FICO risk score is derived from a statistical model that uses information on credit use from credit bureau files to predict the likelihood that a consumer will have a serious delinquency, bankruptcy, or other major derogatory event in the next two years."

So, Fair Isaac must consider two years a long time. In congressional testimony: "In addition, credit scoring systems are designed to predict long-term credit performance."

Narrowing it down even further, TransUnion's site defines "delinquency":

As a group, the consumers in your score range, 750-799, have a delinquency rate of 2%, as illustrated in the graph. This means that for every 100 borrowers in this range, approximately 2 will default on a loan, file for bankruptcy, or fall 90 days past due on at least one credit account in the next two years.

That is echoed on myFICO.com, which says, "In this illustration, the delinquency rate is the percentage of borrowers who reach 90 days past due or worse (such as bankruptcy or account charge-off) on any credit account over a two-year period."

There is a big difference between being 90 days late on your cell phone bill-- and foreclosure.

Imagine-- instead of a FICO score-- you have a health score of 625 (like on the Risk Rate graph). Your doctor tells you, "You have a 31% chance of catching a cold, breaking your leg, or dying in the next two years."

What do you do with that information?

What do lenders do with it? They lend trillions of dollars.

The Score Poor

Some, however, don't even have a FICO score. Fair Isaac claims that 50 million adults (out of 210 million), have either no credit file or a file so thin that a standard score cannot be calculated. Introduced in July of 2004, the FICO Expansion score attempts to fill the need for a score for the unscoreables.

What is happening today with this inclusive, rainbow-colored revolutionary tool? In April, 2005, the National Association of Mortgtage Brokers reported that "GSEs [Fannie Mae and Freddie Mac] and the secondary market are analyzing this type of model." Elsewhere in that letter it paints a rosy picture of hope while in the same breath noting that, five years out, Fair Isaac's better mousetrap, the NextGen score (now up to verson 2.0) never got traction with the FMs. They are too busy with their own problems.

Is anybody watching the scorer?

Saved by the bell. Fair Isaac fields that question as the U.S. House of Representatives hearing runs out of time.

Mr. [Representative] CROWLEY. No, no. What I am saying is, do they know what formula you are using? Not this is proprietary information are they aware of it; not necessarily the general public; but are the people's representatives in government aware of what the formula is?

Fair Isaac scolds the Consumer Federation of America in 2003:

It's unfortunate that the CFA report contains so many errors, both of fact and interpretation... Scoring formulas are not "untested." This is false on several counts. Credit scoring is under regulatory oversight, and the Office of the Comptroller of the Currency [search (try "Fair Isaac")] has reviewed our models and adverse action codes several times.

then joins them in a round of Kum Bah Ya.

Many Americans Misunderstand Credit Scores According to New National Survey
CFA and Fair Isaac Make Available Free Brochure Through Federal Citizen Information Center

What is good credit?

Make your own conclusions. Should you even take proactive steps to improve your credit score? Isn't learning all about the FICO score like getting the teacher's key to the test? If you get a higher score by gaming the system and you don't learn the life-lesson that goes along with your low score, will you succeed as a borrower, or will you become another government foreclosure statistic?

In the old days (before the mid-1990s), before credit scoring and its cousin, mortgage loan automated underwriting, humorless, gray-haired men in gray flannel suits sat behind big desks, and, in their wisdom, divined the difference between good and bad credit; between homeowners and recipients of letters of denial. FICO credit scores and AU ushered in new, unheard-of, liberal lending policies and a new wave of decision making based on statistics, rather than on an old banker's experience and bias. But one set of secrets just gave way to another. If he had gotten his way in the 1990s, you wouldn't even have access to the wizard's FICO—and the man behind the curtain would just keep cranking out secret scores.

Stay off the merry-go-round. The page you are reading now is not what you need to get a better FICO credit score, today's measure of good and bad credit. If your credit report score is low, plan on spending some time studying the system. Don't be sucked in by the advice from the bazillion online / newspaper / television / any-media-outlet-with-a-slow-news-day cheap-and-dirty FICO credit scoring stories and articles. They'll tell you to just pay on time, use credit wisely, blah, blah, blah, blah, blah—no specifics. It isn't magic, and it can be understood by anyone with half a brain, but it takes more than wishing, hoping, hand-wringing and web-surfing.

You, the trapeze artist. Personal finance is not a high-wire balancing/juggling act, and even if it was, you are not forever relegated to working without a net. Put some money in the bank so you are not constantly living on the edge of financial peril. Those are liquid assets, not tied up in a 401K where you can't get to them when you need them. Figure out how to pay your monthly obligations on time, and have some left over to save (not just until you get the house, but for the rest of your life). Use the score simulators at myFICO.com. They are the answer to the questions posed in 1997.

Fair Isaac, myFICO.com: About Credit Scores

Fair Isaac product index: FICO Scores

* July, 2006
⁽¹⁾ Mortgage Banking Magazine, March 1997

FICO Fun Facts

FICO credit score factors and "reason codes"

The other guys (reality)

"The median FICO Score in the U.S. is 723." - Fair Isaac

The range is 550 (300 to 850).

In 2006, a guy in Florida started a service to rent strangers' credit histories to increase FICO scores. Sort of like a sperm bank. This outrage made personal finance columnists all aflutter.

The three consumer reporting agencies Equifax, Experian and TransUnion have slightly different lists of credit score factors (aka "reasons" that the score is not higher; the term "reason codes" refers to the numbers assigned to the reasons). Fair Isaac, itself, gives a dumbed-down version.

Fair Isaac's web site and literature uses Dayton, Ohio, this web site's origin, as the home address of the dummy consumer, John Smith.