AppId is over the quota
It’s difficult enough already to grasp the nuances of consumer credit scoring. So it doesn’t help when industry players are fuzzy about just which score they’re talking about.
Last week, I wrote about a report from FICO, creator of the most widely used credit score. The report, which analyzed data from the credit reporting bureau Equifax, showed an increase in the proportion of people in the top tier of credit scores, and a decrease in the lowest tier. (FICO scores run from 300 to 850; the higher the score, the better your credit. Your actual number may vary, depending on which of the credit reporting bureaus — like Equifax or TransUnion — provides the credit information for calculation by FICO’s formula.)
What FICO failed to note was that the analysis was not based on the version of the FICO score that most lenders still use to rank a potential borrower’s creditworthiness. Rather, the FICO analysis used the newest version of the score, called FICO 8. (Thanks to an alert reader for bringing that to my attention.)
When I followed up with FICO, Rachel Bell of FICO Labs, the company’s research arm, said it did not matter that the report used FICO 8. Individual credit scores might differ under the latest formula, she said, but the trend would be the same, even if an older scoring model were used. Fair enough.
But I would argue that for the sake of clarity, the company should have specified the version of the score on which it based the report, because there is so much confusion among consumers about credit scores, and also because consumers generally do not have access yet to their FICO 8 scores.
Some background: According to FICO’s consumer Web site, FICO 8 was introduced in 2009, and is based on a formula that has been revised to better predict borrower risk. For instance, FICO 8 scores are “more forgiving” of rare late payments, and give more weight to highly used credit cards — those with balances near their limits. “The goal and the methodology for FICO 8 is doing a better job of identifying risk,” Ms. Bell said.
Nearly half of consumers, the Web site says, have FICO 8 scores within 20 points of their scores under the previous version. Ms. Bell said that because the updated formula is more sensitive to predicting credit risk, people with good credit habits would probably see their scores go up a bit with FICO 8, while people who are riskier might see theirs go down.
FICO says more than 7,600 creditors are now using FICO 8. Lenders that have adopted it include Citi Cards, the credit card unit of Citibank, according to FICO. “Our approach is to get lenders using the most current version available as soon as possible,” Ms. Bell said. But that typically takes time.
The company would not disclose the number or proportion of lenders using older FICO scoring models. In an e-mailed statement, a company spokesman, Craig Watts, said FICO 8 “is the fifth generation of our classic FICO scoring model, first introduced in 1989.” He said that lenders’ adoption of FICO 8 has been faster than their adoption of scores from any of the preceding scoring models. “We’ve found over the years that some lenders convert quickly, some lenders never choose to leave their current scoring version for a newer updated one and most lenders fall somewhere in between,” the e-mail said.
Still, FICO 8 isn’t yet the most widely used version. That is why, currently, consumers cannot buy access to their FICO 8 scores on the company’s consumer site, myfico.com. Ms. Bell said myfico.com was intended to offer consumers access to the scores that are most used — so until FICO 8 is more broadly adopted, the scores available for purchase by the public are based on the older formula.
“We’re getting close to that switch,” Ms. Bell said. “There will be a point where we use FICO 8.”
Have you checked your FICO score lately? How do you think your FICO 8 score would compare, and would you like to have access to your FICO 8 score now?
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