Tue 23 May 2006

In Ken Harney’s column this week, Web Credit Scores Don’t Equal FICO Accuracy [WaPo], he discusses the problem with web-based credit score services.

FICO scores, developed by Fair Isaac Corp., are the predominant credit measure used by the mortgage industry. The scores run from 300 to 850 and are used to predict a borrower’s likelihood of future nonpayment, with higher scores indicative of better creditworthiness.

There are a wide array of other scoring models available online but most are not used by lenders which leads to widespread consumer confusion. Lenders use FICO scores to price mortgages. Lower FICO scores can cost applicants hundreds of dollars a month in higher interest payments and thousands of dollars over the term of the loan. Consumers often pre-screens themselves but can be surprised by the descrepency with the actual score.

“We’re getting a lot of angry conversations about ‘why is your score lower’ than what the consumer got somewhere else” online, Clemans said. But credit-reporting agencies are simply middlemen — purchasing reports and FICO scores from the three national credit bureaus, Equifax, Experian and TransUnion — and repackaging them for mortgage lenders.

With rising mortgage rates, there will be greater pressure placed on the credit scoring process as affordability weakens.

5 Responses to “FICO and Fake-O Credit Scores”

1. mapgirl Says:
   May 23rd, 2006 at 9:24 am

   Thanks for pointing out this story. FYI – A lot of WaPo articles require registration. You might want to tell your readers to try Bugmenot.com for a login.

2. Dan Green Says:
   May 23rd, 2006 at 12:38 pm

   One of the major reasons behind “angry conversations about ‘why is your score lower’” is that the credit bureaus do not tell clients that mortgage lenders ignore the new, hot, and sexy credit scoring systems.

   Mortgage lenders have mountains of data representing tens of millions of mortgages. One of the key data points is the correlation between FICO score (where FICO is to Credit Score like Kleenex is to Facial Tissue) and mortgage default rate.

   Lenders use an old and crusty method of scoring credit, but it works. And the more they use the method, the more value the data holds.

   New credit scoring systems provide more information for consumers, but are worthless to the lenders. Case in point: VantageScore.

   Hence, the angry conversations. I have blogged about this topic before. I am happy to post the link here, at someone’s request.

3. Ed Kohler Says:
   May 26th, 2006 at 10:18 am

   I could see things getting really ugly if a consumer was looking at homes on the edge of affordability. Luckily, nobody does that.

4. danny Says:
   June 22nd, 2006 at 10:27 am

   Yes I know what you mean . After years of priding myself with a farly good score 675 through experian , I was shocked to hear from my mortage company that they had me at 605.
   Question? Why not just supply the consumer with the true scores instead of these Web based ones .. PLUS ..etc.
   It seems like a rip off to me

5. David S Says:
   January 26th, 2007 at 10:28 am

   Yea its just a big rip off…these scores that are bought from experian are not the scores lenders see. They mean absolutely nothing.