Fair Isaac * Credit Score * Scoring Model * Fair Isaac Model * Credit Scoring * FICO Score

This documentation part of our reporting on the Credit Scoring Conference we attended in July 1999.

How your credit score is calculated is truly a mystery, and is protected, if not by law but by the FTC. The statistical model (aka FICO Score) used by all three credit bureaus and in some form or other by all banking institutions was developed by Fair Isaac. This scoring model did not start out to be the industry standard, but since it was the most complete model used available at the time when the banking industry was interested in such information, it became an integral part of the credit granting process. The model took years to develop and Fair Isaac has all kinds of empirical data to back up the accuracy of their model. The lending industry, who finds comfort in numbers anyway, gets a warm, fuzzy feeling of fairness: since most everyone uses it, it gives the impression of everyone being measured by the same yardstick.

Why doesn't Fair Isaac tell anyone exactly what goes into the model?

The company maintains that their model is a proprietary system, and it is protecting itself - if it gave away the product, how would Fair Isaac make money? I can see their point, to a certain extent, but many (if not most) American and Canadian consumers are at the mercy of this statistical model. Most people don't realize that the credit scoring model is a product being sold to lending institutions and, of course, the credit bureaus.

Aside from the fact that the mystery of the model is a big source of unfairness, is the model itself unbiased? At CreditInfoCenter, we get lots of questions about this, like "how do you raise your credit score?" What we found out is that lots of what goes into the score calculation is beyond the control of the consumer. Therefore, many people with a low credit score may be able to do nothing about it.

OK, let's get right down to the actual numbers. While we can't give you the whole math model, we can sure give you a piece of it.

At the credit scoring conference held by the FTC in July 1999, Fair Isaac gave the opening presentation and went over in detail some of the things used in calculating your score. The information I am giving out is based on the huge slide presentation given out by Fair Isaac at the July meeting.

Factors used to score you, in order of importance (information marked with a * is obtained from an application, not considered in a credit bureau score):

1. Major derogatory items on your report (bankruptcy, collections, foreclosure, slowpays)
2. Time at present job
3. Occupation (Professionals are given heavy weight)^*
4. Time at present address
5. Ratio of balances to available credit lines (the lower the better)
6. Are you a homeowner? (if you are, this is heavily weighted)^*
7. Number of recent inquiries
8. Age (50+ is the best)
9. Number of credit lines on your report
10. Years you have had a credit in the credit bureau database

So is this fair? Have you noticed that only two of the above items are entirely within your control? And what if you don't care for a professional (whatever that means) occupation?

According to the above scoring model, to get the highest score, you would have to: a) be at your job for a long time, b) be in a a professional occupation (like lawyer, doctor, banker, corporate officer, etc. - does webmaster count?), c) have lived in the same home (that you own, of course) for over 10 years, d) have had credit and loans for many years, e) be at least 50 years old, f) have almost no debt, g)and not have applied for any new loans for the last two years. Oh yeah, and h) have perfect credit.

Here are some of the actual numbers used to calculate your credit, but Fair Isaac says it isn't the whole model (which I do believe.)

Terms:

Bank reference
Whether or not you have a savings and checking account. How would the Fair Isaac model know about your income? The only place would be off an application.

Debt Ratios
Ratios of monthly credit obligations (credit cards, mortgages, car loans (not food, insurance, utilities) over monthly gross (before taxes) Income. Example: Your credit card bills, and car loans total $1,000/month. Your monthly gross income is $4,000/month. Your debt ratios would be 25% or 25. How would the Fair Isaac model know about your income? The only place would be off an application.

% Balances Available
This refers to amount of available credit you have left on revolving credit, like credit cards. It is calculated by dividing your total credit used (over all of your cards) by the total credit limits (over al of your cards) you have. So if you have a total unused credit card limit of $10,000 and you have used $2,000 worth of this available credit, you have used 20% of your available credit.

Years in File
Number of years you have been in the credit bureaus files, approximately the same amount of time you have credit (though of course, not necessarily).

Here is the entire Fair Isaac presentation on the FTC web site.

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