FICO Credit Score Formula To Change

Fair Isaac Corp. is tweaking the formulas behind the company's widely used credit scoring system, which helps banks determine whether millions of Americans receive loans and mortgages.

Executives say changes to algorithms and databases, which will take place starting in September, will improve the accuracy of the company's popular FICO score—particularly for so-called "subprime" borrowers and for new immigrants, young people and others who have "thin files" and lack credit history.

Changes to FICO algorithms shouldn't change anyone's score, Fair Isaac CEO Mark Greene emphasized. But the tweaks will improve the score's accuracy and give banks more confidence in determining a customer's risk.

Starting in the fall, Fair Isaac will expand the number of classifications that consumers fit into. Those who have declared bankruptcy are put into a "segment" with others who have done the same; if not, they'd be assessed too harshly relative to people who have never missed a payment in their lives. The company will expand from 10 to 12 segments. The changes may be good news for new U.S. immigrants.

Fair Isaac's updates come amid growing concern over subprime buyers—people with sketchy jobs or credit histories who purchased houses with adjustable-rate mortgages whose payments have increased and, in some cases, exceeded their monthly income. According to research firm RealtyTrac Inc., mortgage lenders foreclosed on 62 percent more U.S. homes in April than a year ago.

(May 16, 2007)