J.D. Colbert: Unearthing the black magic behind your credit score

Wednesday, January 12, 2011  

J.D. Colbert is a member of the Muscogee Nation of Oklahoma.

Do you know your credit score? More importantly, do you know HOW your credit score is calculated? You don’t!

I can answer that question for you because nobody knows how our credit scores are actually calculated. The only people who know how our credit score is computed are the corporation that is the creator of this Frankensteinian monster. The formula used to calculate your credit score is a secret more closely guarded than Colonel Sanders’ secret recipe of 11 herbs and spices.

The great and powerful Oz of credit scoring is a company called FICO. FICO, formerly known as Fair Isaacs Company, is the company responsible for providing the formulas that calculate your credit scores. FICO has never revealed the witches brew of algorithms that go into calculating your score.

FICO basically licenses their formulae to the three major credit reporting agencies: Experian, TransUnion and Equifax. These three credit bureaus use the information that they have in their database about your past credit history in order to calculate your credit score by plugging these data into the FICO model.

In the past, each of these credit bureaus have had their own proprietary credit scoring system; Equifax marketed a product called BEACON Score, TransUnion a credit score called EMPIRICA, while Experian had their Experian Scores.

More recently these three major credit reporting agencies banded together to come up with a joint credit scoring product called VantageScore to try to compete with FICO’s highly profitable FICO Score. This is one of the reasons why on any given day you can check your credit and receive up to 5 different scores (which can vary widely).

But the FICO score is clearly the dominant credit scoring system. It is used by lenders in granting and rationing credit (seemingly to the exclusion of all other credit factors) and it is used by insurance companies in setting rates for your car insurance and home insurance. In addition, FICO Scores are increasingly being used by employers with regard to hiring and retaining employment.

Given the intrusive and paramount role that FICO scores play in the everyday lives of all Americans and how such scores affect our lives for the good or the bad, one would naturally think that FICO scores would be marked by transparency, disclosure, fairness and openness. That is not the case.

Instead, in Wicked Witch of the West fashion, FICO brews up its life controlling credit scoring formula in the deep dark lower sanctums of their corporate offices in secrecy, in darkness, in seclusion and in a very clandestine manner.

Indeed, it was only in response to tremendous pressure from consumer credit groups that the great and powerful Oz relented and allowed disclosure of these all-important credit scores to individual consumers. So recalcitrant was FICO to these understandable requests that it took a federal law to compel FICO to make these scores available.

So now we can access our credit scores, but when we will be given the right to know exactly how such scores are calculated?

To be sure, there are those who aver that they understand the workings of the mystical formula to the point where they can offer credible advice as to how to improve your all-important credit score. Techniques such as keeping your overall debt to a minimum, not maxing out the credit line of your credit cards and paying bills on time all act to create upward pressure on your score.

In addition, again seemingly only at gunpoint, FICO has publicized the five major factors that go into calculating credit scores. These are: payment history, amount borrowed compared to available credit, length of credit history, inquiries and new debt, and type of credit (viz., installment versus revolving or credit card debt).

Knowledge of these factors and how they can be manipulated does allow an individual to improve their credit score. At the end of the day, however, this situation is akin to the story of the two blind men and the elephant wherein one man feels the elephant’s leg and says it is like a pillar and the other blind man feels the elephant’s tail and says it is like a rope. We know that there is a large creature in the room but we know not what it is.

As with KFC, we only know that there are 11 herbs and spices but we don’t know the identities of these ingredients nor the actual recipe.

There is also increasing evidence that the FICO secret formulas punish good and responsible credit decisions made by responsible and prudent consumers. Also that these FICO scores produce discriminatory behaviors concerning granting credit, housing and employment, most particularly toward the poor, the unemployed, those who have lost a job or have suffered a major illness.

Finally there is this: There is a compelling body of empirical evidence and studies that show a poor correlation between one’s credit score and debt repayment. FICO scores may indeed prove to be poor predictors of future behavior. The FICO crystal ball is indeed cloudy!

In summary, given the prevalent and paramount role that FICO scores have come to play in the everyday life of most Americans, isn’t it about time that FICO come out of the dark, pull back the curtain behind which they are hiding and reveal the ingredients to their secret potion otherwise known as the FICO Score?