Classic FICO® Risk Scores
Classic FICO® risk scores rank-order consumers according to the likelihood that their credit obligations will be paid as expected within approximately the next two years. Classic FICO® scores are by far the most-used broad-based risk score available in the market today, and are considered the gold standard of bureau-based risk scores for credit risk management.
The classic FICO® scoring algorithm for Fair Isaac is sold to, and offered by, each of the three major credit reporting agencies as follows:
§ BEACON® at Equifax US and Canada
§ FICO® Risk Score, Classic at TransUnion US
§ Experian/Fair Isaac Risk Model at Experian
Other scores are offered by the credit reporting agencies, but only those labeled as FICO® scores are the industry standard scores generated from the Fair Isaac scoring algorithms.
NextGen FICO Credit ScoreThe NextGen FICO score, developed by Fair Isaac in 1999, was designed to better identify people's creditworthiness. More people had better scores under this new model, thus, allowing lenders to make more loans, but, purportedly, it also identified credit risks better, thus, eliminating more of the actual credit risks. However, these results are from Fair Isaac, the developer of the model. Because lenders don't have as much experience with the new score, and have not verified that this new model is, indeed, better at assessing credit risk, they have not adopted the new score extensively. The Classic FICO is still the most prevalent score.
The 3 CRAs also have different names for the NextGen FICO score:
PinnacleSM Score at Equifax
FICO® Risk Score, NextGen at TransUnion
Experian/Fair Isaac Advanced Risk Score at Experian
To date, NextGen FICO has not been widely adopted by most creditors.
FICO Expansion ScoreAccording to Fair Isaac Corporation, ¼ of all adults in the United States—about 50,000,000 people—either lack a credit report or have insufficient information in their credit reports to determine a reliable credit score. These people include immigrants, young adults, the recently divorced or widowed, and ethnic groups that typically do not use credit.
To better gauge the creditworthiness of these individuals, Fair Isaac has sought additional information from sources other than credit reports to compute a more reliable score. Because this score is based on different sources of information and computed differently, it has a new name—the FICO Expansion score.
The FICO Expansion score measures consumer risk based on credit data which is not in credit reports, such as deposit account records, pay day loan cashing, and purchase payment plan performance. The FICO Expansion score attempts to measure the likelihood that the consumer will become severely delinquent (more than 90 days past due) in his payments, for up to 24 months after scoring. Like the Classic FICO score, the Expansion score ranges from 300 – 850, with higher numbers indicating greater creditworthiness. However, FICO expansion scores are not the industry standard for most lendor credit decisions.
VantageScore—a different credit score.A different credit scoring system, called VantageScore, was been developed by Equifax, Experian and TransUnion—touted to provide a more consistent scoring system for creditors, and that gives creditors an alternative to the FICO score. It has no affilitation with Fair Isaac scoring algorimthms, and is not translatable into an equivalent FICO score. There are still some differences among the scores of the 3 agencies because each credit agency has slightly different data in their files on each person, but the methods used to compute the score will now be the same for all 3 agencies.
Note that under the Vantage system, a credit score of 760 is considered barely average, but is considered an excellent FICO score.
Although the new scores are available to creditors, it remains to be seen just exactly how many lenders actually use the new score. Many lenders have standardized on the FICO score, and may well continue to use that, especially since the FICO score has been around for a while, and has a track record of predicting the future creditworthiness of the loan or credit applicant. Another reason why the FICO score may be difficult to supplant is that many banks and mortgage companies sell their mortgages in the secondary mortgage market, which generally requires pooling the mortgages, which in turn, requires gauging the risk of these mortgages. Using a new scoring system that has not been extensively tested as to how well it actually measures risk introduces uncertainty in the secondary mortgage markets. Thus, those companies that want to sell their mortgages in the secondary market, which is most of them, might well be reluctant to use anything other than the FICO score to assess risk.
FICO 08Fair Isaac has recently developed and alternative FICO scoring model, calling it FICO 08, to hopefully better predict consumer defaults. FICO 08 will continue to have a range 350 - 800, and it will still rely heavily on the amount of debt and payment history. However, FICO 08 will no longer use authorized user accounts in calculating the score. More positive weight will be given to users who have multiple types of credit, such as auto loans and mortgages, in addition to credit card history, while the debt-to-credit ratio—the total debt compared to a user's total credit line—will be given greater weighting—a higher debt-to-credit ratio will have a more negative effect that it did in the classical FICO scoring model. Numerous late payments will also have a more negative impact, while an occasional late payment will have less impact than in Classic FICO. FICO 08 scores should start appearing in the 2nd quarter of 2008. Experian and TransUnion will be begin using the scoring system on a trial basis with consumers who request it, but it is uncertain at this time whether Equifax will be using it at all. FICO 08 does not replace Classic FICO, it is merely an offered alternative, and like NextGen FICO, is subject to creditor discretion in its purchase and use.
