Credit-Reporting Agencies Create New Scoring Format
ROBERT SIEGEL, host:
From now on, your credit report might start looking more like your old school report card. Three of the major credit reporting agencies are introducing a new way of calculating credit scores. In addition to a new numerical scale, at least one company is assigning letter grades to those scores. Credit worthiness will be rated on a scale of A to F. A is for excellent and F, well you can guess that that means you won't be getting a low cost mortgage with that grade. Beyond the obvious, there may be other implications for consumers.
MICHELE NORRIS, host:
Evan Hendricks is the publisher of Privacy Times. He joins us now to talk about all this. Evan, how have these companies actually changed the way they calculate the scores? What were they doing before and what will they do now?
Mr. EVAN HENDRICKS (Publisher/Editor, Privacy Times): Well what they were doing before is they licensed the credit score from Fair Isaac, who sells us the well-known FICO score. And then they pay a licensing fee to Fair Isaac. Now they're talking about selling their own score, which they wouldn't have to license from Fair Isaac. The problem is there are too many things we don't know. We don't know what are the parameters of this credit-scoring model. We don't know if it's really going to work very well. We do know it's going to be based on information in the credit report, and we do know there's a history of some inaccuracy problems in credit reports. That won't change.
NORRIS: Fair Isaac?
Mr. HENDRICKS: Fair Isaac is the first creator of the widely used credit score, which is known as the FICO score. And there's a lot of knock-off scores on the market. We call them FAKO scores. But right now, some of this looks like a move to possibly cut out Fair Isaac, and so that they can just sell their own score without having to pay that license fee.
NORRIS: And they're also going to replace those three digit numerical scores with letter grades, A through F.
Mr. HENDRICKS: One of the bureaus, Experian, is saying they want to make it like a report card. You got an A or you got an F. The other two are still talking about using a numerical score, which will be a new scale from 500 to 900 where the scale we know with Fair Isaac is 350 to 850. So if they're, right now there's growing awareness and understanding of credit scoring. Most people know that if you're 740 or above with a FICO, you're top of the line. If you're 620 or below, you're sub prime. With this new model, we don't know where those parameters are going to fall yet. And we also don't know how many lenders are really going to adopt this thing.
Lenders traditionally do not like having to change the credit scoring models they're using. Even when Fair Isaac in 1999 rolled out its new and improved model, most lenders just stayed with the old one because apparently they thought it was good enough.
NORRIS: But what does this mean for consumers?
Mr. HENDRICKS: I think what this means for consumers is they have to start by getting to know the current system, and know about how that impacts them. Because that system will stay in place for the near future no matter what. I'm skeptical that the new system is going to be widely adopted even in the mid term. So, you really need to know how the current system works to make sure you can make it work for you.
NORRIS: What's in it for business?
Mr. HENDRICKS: Theoretically, if they come out with a better model that dissects you more as a consumer and gives them more precision in figuring out whether you're a good credit risk, that's what would be in it for them. But I'm not sure they need that kind of precision right now in the lending world. And I'm not sure there's any demand for it either.
NORRIS: I think what I hear you saying, if it ain't broke why fix it?
Mr. HENDRICKS: If it ain't broke why fix it, and also, like, if you're handicapping this, and you're sort of betting on whose going to end up the winner, I mean my money's still on Fair Isaac right now.
NORRIS: Evan thanks so much for coming in to talk to us.
Mr. HENDRICKS: Sure.
NORRIS: Evan Hendricks is editor of Privacy Times Magazine. He's also the author of Credit Scores and Credit Reports, How the system really Works and What You Can Do.