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More credit card issuers are augmenting the tools they use to score prospects and are relying less on FICO scores to gauge the creditworthiness of mainstream borrowers.
Minneapolis-based Fair Isaac Corp. developed the three-digit FICO score in the 1950s. It remains an important part of issuers' underwriting processes, enabling them to assign borrowers a score between 350 (riskier or subprime) and 800 (the most creditworthy or prime).
Issuers' new approach involves putting greater emphasis on other types of consumer financial data than they did in the past. They then combine that data with FICO scores to determine creditworthiness of card prospects.
FICO scores reveal a consumer's history in repaying auto, card, mortgage and other loans. Card issuers, however, say other data, such as employment history, mortgage status and ability to consistently pay routine bills on time, are playing a bigger role in the mainstream credit-evaluation process. The result is a more-detailed analysis of mainstream prospects' capacity to repay credit card loans, especially during an economic downturn.
"FICO scores are widely used by most credit card issuers, but even those who use FICO scores are starting to look at alternative types of data, such as rent and utility bill-payment history, to get a clearer look at borrowers' financial pictures," says Adil Moussa, an analyst with Boston-based Aite Group.
Lenders also are turning to a growing array of alternative data resources to assess risk for consumers with little or no data in their FICO files, such as students and immigrants.
"FICO is not a major consideration in our credit actions," American Express Co. CEO Kenneth Chenault explained during a conference call with analysts earlier this year. "We recognize that scores can become inflated and, therefore, we use [FICO scores] more as a point of reference."
For example, AmEx uses FICO scores to help rank prospects but then bases its approvals on data that are more predictive of a prospect's true creditworthiness, Chenault said. AmEx considers the total size of wallet, segments the prospect's needs between spend and revolve capacities, and examines home value and the amount and type of debt held.
"By using a range of factors, we believe we're knowledgeable about an applicant before they even join our franchise." Chenault said.
Discover Financial Services also uses FICO scores, but increasingly the company is factoring alternative data into its analyses, James Panzarino, Discover senior vice president and chief risk officer, tells Cards&Payments. "We feel FICO scores have value, but we take that information and enhance it with a ton of other data and variables to provide a much more sophisticated view of prospective customers."
Discover also is enhancing its risk-management operations this year, hiring dozens of new risk-assessment experts and building a new risk-analysis facility in Shanghai, China. The facility will serve as Discover's primary credit-analysis center for its U.S. credit card-issuing division, Panzarino says. By the end of next year, he expects Discover to have about 100 highly educated, full-time risk-management professionals working for the company in China.
"In China we are finding professionals with the kind of Ph.D.-level math and science skills we need to create effective risk models," Panzarino says. "And from an economic point of view, we can hire three professionals there for the price of one [in the U.S.]."
A New Fico
Fair Isaac also is making changes this year in its processes. Beginning this month, the company plans to roll out FICO 08, the first major update to its basic credit-scoring product since 2000. Among other changes, the new scoring formula will provide a more-precise analysis of borrowers' payment histories, which should benefit card lenders.
Fair Isaac has spent the past few years developing FICO 08, but its arrival coincides with issuers' need to beef up underwriting capabilities in the wake of the subprime mortgage meltdown that began last year.
Lax mortgage-underwriting policies, which led to loan approvals for many borrowers with subprime FICO scores, launched the avalanche of consumer-credit defaults. The subsequent crash in real-estate values contributed to a sharp rise in credit card charge-offs and losses beginning last fall (see Cover story on page 36). Amidst reports of steep losses during the fourth quarter of 2007, card issuers promised Wall Street they would tighten lending requirements and improve their risk-management operations to offset future losses.
FICO 08 provides several improvements, including more-precise details about consumers who miss payments. A single missed payment may not darken a consumer's credit score, as in previous FICO models, says Careen Foster, Fair Isaac product manager of scoring solutions. But with FICO 08, a pattern of habitually late payments will result in a lower credit rating, she says.
"We have refined the data to accommodate a range of blemishes on a consumer's credit record so that someone with one delinquency isn't evaluated exactly like someone with multiple delinquencies," Foster says.
FICO 08 also will make accommodations for consumers who maintain multiple lines of credit, a condition that previously could result in lowering a consumer's credit score. In another change, the new version introduces credit-score penalties for those who maximize their available credit, which typically is a sign of higher risk.
The new scoring system eliminates the use of "authorized users," which led to the frowned-upon practice of "piggybacking," or borrowing another person's score to establish credit. That option led to well-documented abuses ("Crackdown On 'Piggybacking' Creates Unintentional Woes," November 2007).
Foster says Fair Isaac expects FICO 08 will result in some consumers' scores changing "plus or minus by 20 or 30 points," while giving lenders a more-accurate view of the borrower's payment history.
Two of the nation's major credit bureaus, including the Costa Mesa, Calif.-based U.S. arm of Dublin, Ireland-based Experian Group and Chicago-based TransUnion LLC, plan to adopt FICO 08 later this year and include it among the credit scores they offer to lenders. The third large credit bureau, Atlanta-based Equifax Inc., which Fair Isaac is suing over anticompetitive practices, declined to comment on its plans.
Keeping Score
Although FICO is the most-commonly known credit score, credit bureaus offer many scores to suit lenders' various needs. TransUnion offers about 40 different scores, and credit card lenders tend to use six of them, says Chet Wiermanski, TransUnion group vice president of analytic and decision services.
"Credit card issuers are always looking for additional data sources to improve their risk processes, but the uncertainty in the economy this year is causing even more demand than usual," Wiermanski says.
TransUnion, he notes, continues to see demand for VantageScore, a credit card score developed jointly with Experian and Equifax and introduced in 2006 as an alternative to FICO scores. VantageScore provides three-digit credit scores within a range of 501-990. Wiermanski claims several major issuers are using VantageScore but declined to name them. He says one of VantageScore's biggest draws is that it bars the use of unauthorized users, he says.
"We spend a lot of time trying to stay ahead of people who fraudulently manipulate their credit reports, and VantageScore blocks this type of thing in a variety of ways," such as identifying attempts at piggybaking, Wiermanski says.
Demand Rising
Even companies that provide alternative credit data to score unbanked customers with little or no credit history are seeing more demand from mainstream card issuers. Tom Brown, vice president of financial services market planning at New York-based LexisNexis Risk & Information Analytics Group, says large issuers are tapping RiskView, LexisNexis' database of public records that includes property ownership and bill-payment history, to augment decisions about credit card loans to mainstream customers.
"Credit card issuers are asking us to provide alternative data to round out their information about mainstream borrowers," Brown says, declining to name the issuers.
Whereas FICO scores reveal repayment histories on consumer loans, RiskView provides another layer of detail about prospective borrowers' bill-payment histories and real-estate holdings, including the existence, type and status of a mortgage, bankruptcy, lien or judgment, he says.
"Some of this data reveals a picture of a prospective borrower that is better or worse than an issuer would see from a FICO score," Brown says. "As issuers get into a more-competitive situation, these tools can allow them to say 'yes' to more customers, in addition to blocking people who are not good risks."
FICO scores likely will remain the bedrock of credit card risk-management. But new streams of data and more-sophisticated scoring processes should bring more clarity to their decisions. CP
