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.
Seen at the Washington Post:
Mortgage lenders hunting for delinquent homeowners who have dodged their phone calls and letters are employing aggressive new methods to track them down, potentially making every knock on the door or fancy envelope seem like part of the pursuit. Even wedding invitations are suspect.
The idea, they say, isn’t to twist arms. Instead, it’s to avoid foreclosures, which have cost the mortgage industry billions of dollars in the past year.
Ocwen Financial is negotiating a deal with HomeFree-USA, a nonprofit group, to go door to door in the Washington area to strike deals with elusive borrowers. Fannie Mae is offering foreclosure lawyers up to $600 to help find solutions for these homeowners. Wells Fargo is disguising its letters in different colored envelopes, including some resembling wedding invitations.
Of course, the story also deals with some of the unfortunate aspects of the dunning side of the credit industry—getting lost in phone-menu hell, repetitive calls from bill collectors. But at least there are some signs that lenders are realizing there might be more effective ways to address problems in their mortgage portfolios.
Seen on the AP wire:
Egg, the Internet bank owned by Citigroup (NYSE:C - News), will withdraw credit cards from 161,000 customers following a risk review, a spokesman for Egg said on Saturday.
The company has given seven percent of its credit card customers 35 days’ notice that it was ending their card agreements, he said.
“The credit profiles of affected customers had deteriorated between the time they joined Egg and the acquisition (by Citigroup) in May,” Egg said in a statement. “The decision to end these customers’ agreements was taken after conducting a one-off, extensive risk review of our (customers)…”[...]
The customers affected will not be able to use their Egg credit card once the notice period has ended, although they can continue to make minimum monthly repayments or pay up in full.
Of course, the concept of having your credit card yanked by the bank horrifies some folks. It’s all too easy for me to imagine the screams of horror from consumer advocates that the mean, evil bank would yank the credit card from a poor, hapless soul in this economy where plastic is a virtual necessity.
I can even imagine some of those consumer advocates being the same ones who bemoan the practice of “predatory lending”.
Wisebread observes:
Is this right? Do we really need to be protected from ourselves, or is this a basic violation of our consumer rights? As a consumer advocate you think I’d be torn, but I think the general public have been spending without prejudice for way too long and the results are showing. Maybe we really do need a big brother figure to watch over us when things get this out of hand.
Several other banks in the UK are soon expected to follow suit, and I’m sure the US banks are watching very closely. Tired of getting burned by non-payers, bankruptcies and credit-card shufflers, the US banks could soon be striking back at consumers who are consuming way more than they can afford. It may just be one of those shocks to the system that America needs. A basic right, a credit card, could soon become much more of the privilege it used to be. And about time, too.
Since I’m simmering over experiencing first-hand what the practical implications are of medical TPA’s being safe from bad-faith or other consumer grievance claims under ERISA (see this post and the one I’ll write once my temper has cooled a bit more), something tells me that I should restrain myself from commenting too much on this:
MSNBC’s Red Tape Chronicles has a post discussing one of Fair, Isaac’s new products:
The project, dubbed “MedFICO” in some early press reports, will aid hospitals in assessing a patient’s ability to pay their medical bills. But privacy advocates are worried that the notorious errors that have caused frequent criticism of the credit system will also cause trouble with any attempt to create a health-related risk score. They also fear that a low score might impact the quality of the health care that patients receive.[...]
Several published reports have described Healthcare Analytics product as a MedFICO score, computed in a way that would be familiar to those who’ve used credit scores. The firm is gathering payment history information from large hospitals around the country, according to a magazine called Inside ARM, aimed at “accounts receivable management” professionals. It will then analyze that data to predict how likely patients will be to pay future medical bills. As with credit reports and scores, patients who’ve failed to pay past bills will be deemed less likely to pay future bills.
And at this point, I’ll stop, since my “professional and recreational stats-geek” side and my “inner consumer advocate” are in serious conflict as a result of events of the past week. The pros and cons of such a scheme, I’ll leave as an exercise for the reader, for now.
