When I did my stint in insurance credit scoring, part of the gospel I preached was that the actual numeric score coming out of the model was meaningless without context.
The main reason I said that was because of the abundance of scoring models in use among insurers. Fico had at the time 18 different insurance scores at each of the three bureaus, Choicepoint had its own fleet of models which, while designed for portability, could still vary somewhat depending on which bureau’s data was pulled, and many if not most large and mid-sized insurers were dabbling with their own proprietary models.
And that was just within the insurance industry. Over in the banking world, where every bank of note seemed to have its own flock of statisticians building proprietary models for various purposes, even as Fico and the individual bureaus were marketing their own industry solutions…. Telling me that you have a 750 score doesn’t exactly tell me a heckuva lot unless you can also tell me something about the model, the distribution of scores, the potential use, et cetera.
But people believe in the illusion of concrete fact embodied by a magical three digit number, and my message tended to fall on deaf ears.
I feel a little vindicated, however, by a story that ran in the Wall Street Journal (subscriber link) last week:
These days, hardly anyone questions the power of the almighty credit score. Lenders use it to determine who qualifies for a loan and what interest rate they get, insurers calculate premiums based on it, and employers use it to help make hiring decisions. As a result, sales of scores, reports and credit-monitoring services to consumers by the three major credit bureaus — Experian Group Ltd., TransUnion LLC and Equifax Inc. — generated $488 million in revenues in 2006 and are expected to reach $864 million by 2010, according to research firm TowerGroup.
Yet the scores that consumers buy from the credit bureaus or heavily promoted Web sites like FreeCreditReport.com or TrueCredit.com — owned by Experian and TransUnion, respectively — aren’t the same scores that are sold to lenders, landlords, insurers or employers.
Take FICO, the credit score developed by Minneapolis-based Fair Isaac Corp. that the majority of lenders use. Depending on the type of credit a consumer seeks — a mortgage, installment loan, auto loan or credit card, for example — lenders will use different “flavors” to determine a consumer’s default risk. Auto-loan payments, for example, weigh more heavily in the formula that calculates a FICO score for auto lenders, while credit-card payments matter more in the score used by credit-card companies.
Adding to the confusion: Each time Fair Isaac rolls out a new version of its scores, some lenders implement them while others stick to the old ones.
I can imagine the consumer advocates now, howling “why can’t we have The Score”.
The answer, as much as no one likes it, is that there is no One True Score. Users of credit data, be they banks, insurance companies, utility companies, cell phone carriers, etc. will tend to favor whichever model is most predictive for their purposes…or build a new model if they think they can get additional lift.
I can see where someone would argue that it sucks that consumers won’t always know The Answer beforehand, due to the abundance of scores in the world. On the other hand, because of the difference in opinions among models, there’s always the room to shop around for a better answer, particularly if you have a so-so credit history.
Besides, the advice about what to do to optimize one’s score under any credit model is generally the same — if you pay your bills on time, have a reasonable number of credit accounts which you use sparingly, and if you don’t churn your credit needlessly…you’ll do OK.