Sometimes we don’t know exactly how broken things are until after they get fixed.

Case in point: Fair Isaac Corp., the company that created the model used to calculate the scores underlying millions of consumer loan and credit decisions.

The New York Times described Fair Isaac’s formula as “one of the most widely used and influential credit scores.” The information it generates is used in the credit reports generated by Equifax, Experian and TransUnion, the three big companies that gather information on individuals and track their credit ratings. It is hard to understate the influence of FICO, as the company and its namesake scoring system are called.

Like all models, FICO has its flaws. Last week, the bad news was we learned how much more deeply flawed this model was than we previously understood. The good news is that Fair Isaac has been cajoled by the Consumer Financial Protection Bureau, an agency created by the Dodd-Frank Act, into applying more balance and fairness in its metrics.

There were two significant changes:   Continues here



Category: Credit, Economy, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “One Cheer for Fair Isaac”

  1. ByteMe says:

    Yes, let’s thank Republicans for helping to create the CFPB to help look out for consumers!!

    Oh… wait… no, they didn’t do that. A$$-hats.

  2. S Brennan says:

    I’d add

    False Data: Reusing data that has been successfully refuted previously and is then simply is added back as a new source information is imported into the database wholesale.

    Paying off Bills: Fully paying off your house/HELOC will hurt your score…I mean WTF?

    Non-contextual data: Somebody who has a 2 year job loss and resulting economic woes in 1998 is a different creature than somebody who, struggles through a two year job loss in 2009. Surely, these shining lights of brilliance, [I speak of course of the economics profession], can design in a damping function which adjusts for historical economic downturns?

    • WallaWalla says:

      Similar to paying off one’s mortgage, I was absolutely shocked to see that my credit score went DOWN when I payed off my student loans in full ahead of schedule. Shouldn’t that be a sign that I am in fact a credit-worthy and responsible individual? Instead they have a perverse incentive system designed to keep you indebted and paying more interest over time.

      • jasonb says:

        Perhaps this is because, from the lender’s perspective, early repayment is actually a risk — it means the interest they’ll make on their loan to you will be less than they originally projected. Prepayment risk is probably more benign than default risk, but it’s still a risk, and so in this sense it’s reasonable that doing it would lower your FICO score (and hopefully it’s much less of an impact than defaulting on the loan).

  3. farmera1 says:

    Medical bills, ugh… My personal encounter with medical bills and unscrupulous doctors.

    I have excellent credit scores and history. A local doctor billed me for a payment the insurance company already had paid to him. He refused to take the insurance payment off my bill and continued to send me bills even after I proved the bill was paid with copies of checks cashed by the doctors office and letters from the insurance company. I told the doctor the bill has been paid and I wasn’t about to pay it again. He said he would just put it on my credit report as unpaid. I said go ahead, and he did.

    Turns out this guy was a crook in so many ways. He was eventually ran out of town for being a terrible doctor and for financial fraud. Not to worry though he probably just set up shop in some other town.

  4. lo574 says:

    Yes, if you payoff your credit cards in full each month – they ding you
    If you are a blue collar worker, you automatically get a lower score than a white collar worker – even if your credit cards, loans, etc. are identical
    If you (finally) payoff an old medical collection after making payments, your score goes down b/c it’s considered “new activity” on the account. Almost better to leave them sit there and collect dust until they fall off your report in seven years. (Seriously?!)
    There’s much, much more and it’s more than ridiculous.

  5. DSS10 says:

    FICO, as a predictive model is pretty piss poor. Any statistical model used in a academic or research setting has to go through a “VV&A” process (Verification, Validation, and Accreditation) by separate parties, without a conflict of interest, to be deemed useful and predictive (1). FICO scores are, for the most part, directional but not granular enough to justify varying costs of financing. As to unpaid medical bills being predictive for default, neither insurance companies or hospitals will disclose there contracts or pricing yet the patient is held liable for either party not performing under the agreement that they are not privy to. I wonder if my score went down when Argentina missed their bond payments because I am as much of a party to that transaction as I am to the relationship between my insurer and health care provider…..

    (1) Reinhart and Rogoff are self excepted due to ideology.

  6. Mbuna says:

    I feel it is important to understand that FICO scores, from the very beginning of their commercial application, were and are only secondarily (or maybe not even that) related to credit worthiness. FICO scores are all about how much money can ultimately be made off the consumer by those businesses using the service. They make it all look nice on the outside and hide the insidious details where the consumer can’t see them, a perfect stealth product. It is a brilliant product in that sense.
    “That Fair Isaac didn’t differentiate between paid and unpaid bills is beyond embarrassing.” I don’t think so Barry. This is a feature of the product not an oversight. They were not that dumb when they put this together- they planned it this way. Ultimately this is about sales for (Un)Fair Isaac and profits for users of the service and little else.