There’s at least one group, a subsidiary of the National Association of Federal Credit Unions, that’s pushing for lenders to abandon FICO as its industry standard in lieu of an alternative it says is more accurate. But is it and can a new agency step into the giant shoes FICO has comfortably occupied for decades? Some say yes while other are still slightly unsure.
Soon, credit card companies, banks and mortgage companies may not pull a traditional FICO score when evaluating an applicant’s eligibility. And the reason is one you might not expect. In early August, data was released that shows the collective nation’s average FICO score hardly moved in the past few years, despite a dark recession. Now, many analysts are wondering if there’s a problem with FICO as they say consumer credit ratings should be as bad as the recession. Instead, they insist scores don’t reflect those difficult months.
FICO has traditionally been the go-to source for creditors and potential employers – and it’s been that way for many years. It’s what lenders use in 90% of all financial loans in this nation and most recently, it’s what employers use to assess whether a job applicant is truly qualified for a position. Now there are those who say it’s inaccurate and antiquated. As a result, some groups, including the National Association of Federal Credit Unions say VantageScore is a better choice because it’s far more accurate.
Even if some businesses have yet to even consider changing their network of choice, there’s no denying the number of banks and other lenders have begun to rethink FICO and its accuracy. Many are already conducting their own tests in an effort to see just how different the scores look on an applicant. There are many who don’t want to abandon FICO, but instead, are using both services in an effort to gain a total picture of a would-be customer. It’s all about diversity, they say. Soon, though, it may be a duplicitous effort.
For years, there have been lenders, especially mortgage lenders, that use their own scoring models. Those lenders that provide these bigger loans, but that don’t sell them to government agencies like Fannie Mae or Freddie Mac, say they have a better handle on what works and what doesn’t. The Mortgage Bankers Association, located in DC, says the custom scores take into account FICO numbers, but the calculations include other risk factors. Experian says as many as 80% of the nation’s big banks are using customer evaluation models.
It’s going to take some time for folks to completely abandon FICO, if at all. Despite the preference by some of VantageScore, this is only used in less than ten percent of loan applications. FICO says it will continue to “innovate to stay far ahead of our competition”. A spokesperson for FICO, Anthony Sprauve, says he’s confident that credit unions and other lenders will
continue to rely upon FICO scores to make their most objective, accurate and profitable risk management decisions.
Its consumer division, myFICO, was introduced two decades ago and is still considered the
global standard for measuring credit risk in the banking, mortgage, credit card, auto and retail industries.
Its website says it plays a role in 90 of the top 100 largest U.S. financial institutions, who use the FICO Score to make consumer credit decisions.
It began in the 1960s when Fair Isaac revolutionized credit risk scoring for the financial services industry. While it was first considered unnecessary, it didn’t take long for that necessity to reveal itself.
This new approach to lending enabled financial institutions to improve their business performance and expand consumers’ access to credit. Today Fair Isaac’s FICO score is widely recognized as the industry standard for lenders,
says the credit agency’s website.
There are others who say a shift is long overdue and it’s one that includes not only a combination of resources, but several – each with their own “tri score” methods. It’s the only way to accurately determine the creditworthiness of a borrower.
So what does this mean for consumers? For years, these models have been akin to trying to read a foreign language. Little, if any, makes sense. For instance, some borrowers don’t understand that despite a high credit score, they’re still denied credit. They aren’t aware that other factors, such as debt to income (DTI) ratios play a big part in the decision making process.
For months, there has been talk of massive changes in the financial sector, including an announcement by the Consumer Financial Protection Bureau that it would soon be overseeing all three major credit bureaus, which include Equifax, TransUnion and Experian. Few are happy with that announcement. The government agency says the massive number of inaccuracies on consumer credit reports is indicative of bigger problems at all three agencies and that its goal will be to reduce those errors to ensure better reporting and accuracy.