FICO 2008 - Demystifying the Latest Version of the Famed Credit Score
Written by Mike Killian
Posted On: March 6, 2009
Editor's Note: This article is the first of a two-part interview with Chris Groppa, Account Supervisor for Fleishman-Hillard, Inc. and Ethan Dornhelm, scoring scientist for Fair Isaac.
Prior to 1989, credit approval was subjective and time consuming. If an underwriter did not like the color of your hair, you might not be considered for your loan. Similarly, each individual's credit report had to be viewed and analyzed, which often added days or weeks to the loan process. All of that changed with the mathematical innovation known as credit scoring.
I contacted Chris Groppa, Account Supervisor for Fleishman-Hillard, Inc., as well as Ethan Dornhelm, scoring scientist for Fair Isaac. They have lots of information about a new scoring system known as FICO®08.
Mike: For those not sure what a FICO® score is, can you offer a mini background on FICO®?
Chris: First introduced in 1989, Fair Isaac's FICO® score has gained widespread acceptance as the industry-standard measure of consumer credit risk, enabling lenders to objectively and fairly extend financial opportunities to millions. Your FICO® score is calculated using the information in your credit reports. The median score is about 720 on FICO® scale of 300-850. The higher the FICO® score, the greater the likelihood of repayment. Credit reports contain all of the information that each credit bureau has on file about you. The information that the credit bureaus collect in your credit report includes your credit accounts, how many times lenders have requested information about your credit (inquiries), how many times lenders have turned your account over to a collection agency (collections), and certain legal items (such as bankruptcy filings, tax liens, and judgments).
Mike: Why is FICO® scoring important to the consumer?
Chris: Consumers who maintain a strong FICO® score can improve their ability to get lower interest rates on loans. A better FICO® score can also help them qualify for more favorable terms on an auto loan or mortgage refinance, lowering their monthly payments. That kind of help can be vitally important to millions of people facing financial challenges. Today, 90 of the largest 100 financial institutions, the 25 largest credit card issuers, and the 25 largest auto lenders rely on the FICO® score to help make lending decisions. U.S. businesses have used more than 100 billion FICO® credit scores to make smart decisions about their customers and prospects.
Mike: What is the rationale for change in FICO®08?
Chris: Since the introduction of its FICO® score in 1989, Fair Isaac has routinely redeveloped the scoring formula. FICO®08 is the company's latest update. Redeveloping the formula in this way keeps the scores attuned to consumers' credit habits. It also allows Fair Isaac to make changes to the model to meet lenders' needs, and it enables the introduction of technical innovations that significantly enhance the score's predictive power. The redeveloped FICO®08 score offers more refined risk prediction compared with prior versions. As a result, the formula provides significantly improved risk evaluation across the entire population of consumers. Fair Isaac is working closely with leading lenders and government regulators to help them understand how FICO®08 scores are addressing the changing needs of the industry.
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