Have you ever wondered what happens behind the scenes of the credit score industry? I sit down with Anthony Sprauve, Senior Consumer Credit Specialist from FICO, to get answers!
The interview was recorded live from the Country Financial Podcast Stage at FinCon14. According to Anthony, this is quite possibly very first FICO audio interview. Anywhere. Ever.
We hammer out the clear and correct information about FICO and the credit scoring industry:
- How FICO is able to capture our data from credit card companies, auto loans, student loans, etc.
- The relationship FICO has with the big three credit score bureaus: Experian, Equifax, and Transunion
- Which score is the real score?
- What is FICO 9 and how will it change someone’s score?
- Is there an imbalance between evaluating the everyday American’s score and someone who doesn’t use debt products (Debt Freedom Fighters)?
- When will FICO begin using non-debt payments in the credit score?
Steve: “Tell us first of all, what is FICO?”
Anthony: FICO is the company behind the FICO score, the score used by the vast majority of lenders as part of making a credit lending decision. The FICO score is a mathematical algorithm that is run against the data in a person’s credit history to generate a three digit number. This number is an indicator to the lender of how likely you are to repay a debt.
Steve: Explain the relationship the FICO has with the institutions that upload consumers’ payment data.
Anthony: FICO has created a mathematical algorithm, this algorithm is licensed out to the three credit bureaus (Experian, Equifax, and Transunion). Lenders report a consumer’s payment history to these credit bureaus who in turn run the algorithm against this data to produce a FCIO score. FICO has no direct relationship with lenders in terms of how they report and what they report. FICO just provides the algorithm that the bureaus use.
Steve: What is the advantage of the lenders sending FICO that data?
Anthony: The lenders are inputing data and creating a base that they can tap into to help analyze a future customer’s ability to pay back a loan.
Steve: How is it that FICO can capture the data from a credit card company, student loans, bad medical debt, etc.?
Anthony: The lenders send in a data report every month. This report includes your credit cards, your mortgage, your student loans, your auto loans…. and any other loans. They report on whether or not you paid and if you paid on time.
Steve: How did FICO come about determining what data is collected to be used in creating a score?
Anthony: FICO’s founders engineer Bill Fair and mathematician Earl Isaac had done analysis on a variety of data to determine which data is predictive of someone’s likelihood to repay a debt. Their research showed that a person’s name, address, and sex was not useful. But, data showing how you paid back your previous loans was very useful. We all like to think we are unique but mathematically we are very common. There are consistent trends we can see based on past behavior as a predictor of future behavior.
Steve: What is FICO’s relationship with the three credit bureaus (Experian, Equifax, and Transunion)?
Anthony: We are “frenemies” in the current vernacular. FICO sells a mathematical algorithm to these bureaus, and they use them to create their own credit scores. They each market and sell their own credit score. FICO has a business relationship with them and nothing more.
Steve: What is the business of these three credit bureaus? I can go to myfico.com or annualcreditscore.com to obtain all three credit scores. Which one is the FICO score?
Anthony: There are multiple FICO scores, one at each bureau. The score that your lender uses will depend on the relationship they have with the bureau. Different lenders use different bureaus, so they’ll pull different FICO scores. The reality is that the scores are all based on the same core algorithm, and because of that, you’ll see minimal differences between each version.
Steve: This can be very confusing to the consumer when it comes to figuring out what their score is since there are three different numbers. It all depends on which one the lender is using.
Anthony: Taking a step back, there are three basic behaviors that every consumer should undertake that will ensure whichever score the lender pulls is going to be a good score:
- Pay your bills on time, every time.
- Keep your credit card balances lower than 30% of your available credit.
- Only open new credit as needed. If you are doing these three things consistently, you’ll have a good score.
Steve: The credit score is based off of debt products. If I pay my cell phone bill, my cable bill, my electric bill, or my rent on-time every month it doesn’t affect my credit score. But if I’m late, my score is going to take a hit. Do you feel that there’s an imbalance there?
Anthony: FICO is starting to realize that there is data like you mentioned that can be a predictor of a person’s ability to repay debt. They are in the process of looking at that data, analyzing it, and determining how predictive it is.
Steve: We are told that we must borrow money in order to build a good credit score. There are kids graduation college with no student loans and they drive cash cars. But when they want to buy a home they are told they need to take out a credit card to establish good credit in order to quality for a home loan. When will FICO be able to evaluate that type of person equally along with someone that does use credit?
Anthony: The world is changing, and we see in our data that many millennials are not engaging in credit the way their parents did. They are living a cash based life and using debit cards. Because of the laws in place, like the Fair Credit Reporting Act, the data we need to collect on this type of person must be broad and accessible. It needs to be data that a consumer can correct if there are mistakes. Most of all, it must be proven to be a predictor of ability to repay debt. FICO is undertaking a way to analyze payment history of non debt bills (cell, cable, rent). Logically it makes sense that a person who is consistently paying his cell phone bill on time would be a person that would repay debt. But this data needs to be looked at in the context of other data and not in a vacuum by itself. A person may be in a situation where it is critical that his cell phone bill gets paid, and he does that above everything else, and he’s letting other bills slip. It’s not a simple process; it requires a deeper and broader analysis. We should be in a position to talk about that type of data sometime in 2015.
Steve: So the data coming in is all voluntary and there’s no non debt products coming in. So do we need to get cell phone companies and such reporting their data?
Anthony: Exactly. The data needs to be reported, and it needs to be broad and deep. Rental data is very inconsistently reported; landlords of every size need a system where they can easily report their data. The will created a data base that they can use to evaluate future customers.
Steve: According to the Fair Credit Reporting Act, lenders are required to not show bias to whom they lend money. Do you see FICO as the solution?
Anthony: The beauty of the FICO score, when it was created 25 years ago, is that it democratized credit. It was no longer a matter of who you knew at the bank. The FICO score leveled that playing field by becoming color blind, sex blind, etc. Because of the change in economics today, there is a need to continue that effort to democratize credit for those who fall outside of traditional credit box.
Steve: What do you wish that the media would promote or explain better about the FICO score?
Anthony: The FICO score is not a mysterious black box. It is an actual reflection of you, and you have control over that score. If you pay your bills on time every time, keep your balances below 30% of your available credit, and only open credit as you need it, you will have a good score. If you stumble financially, this does not condemn you to bad credit health. You can rebuild over time with good behavior.
Steve: Do you think FICO could be doing more to educate the consumer about the dangers of debt and overuse of credit?
Anthony: We’ve been educating consumers about good credit management for the past 10 years at myfico.com. We could do a better job of promoting that myfico.com is out there. You’ll find tons of free information and a forum that helps you manage your credit and finances better.
Steve: When will FICO start to look at non-debt payments to include in the credit score?
Anthony: It’s hard to say when this will be adopted by the market, but we will be addressing this in 2015.
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Alternative to credit scores: eCredable.com
Listen to an interview with eCredable CEO Steve Ely about using alternative credit tools and how they are supported by the law.
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