🤓 The FICO score: An algorithm worth obsessing over (but not too much)

[Quartz Obsession] The FICO score December 08, 2017 What's your number? --------------------------------------------------------------- Earlier this year, credit reporting giant Equifax disclosed a massive breach: Thieves stole the personal information of [more than 145 million Americans]( plus hundreds of thousands more from the UK and Canada. Most people think about their credit scores as little as possible (not all!—see below for the obsessive exceptions) but these intrusions forced the public to reckon with their FICO numbers as never before, along with the giant firms that store immense troves of consumer information. Credit reporting companies like Equifax have been collecting information on people for more than 100 years. Since the 1950s, they’ve been using algorithms from a firm called Fair, Isaac, and Company—today better known as FICO—to assess creditworthiness. We take it for granted today, but the advent of the statistical approach to issuing credit was revolutionary. It made borrowing more fair and gave many more people access to credit. But the Equifax hack highlights some of the limits of this system, and upstarts think it’s time for FICO to give way to something new. By the digits [100 billion:]( Number of FICO scores sold so far. 850: Maximum FICO score (below 650 may be considered “subprime”). [200 million:]( US consumers with FICO scores. [1.4%:]( Proportion of US consumers who have perfect 850s. [40%:]( Proportion of online daters who think a good credit score is more attractive than a hot body. Chart it Too much of a good thing? --------------------------------------------------------------- Americans love borrowing money—maybe too much. FICO algorithms can help determine whether a consumer is creditworthy, but it can’t force lenders to make prudent loans. Origin story The FICO founding fathers --------------------------------------------------------------- Engineers and mathematicians are seldom seen as civil rights champions. But FICO founders Bill Fair and Earl Isaac arguably belong in their ranks, even if their algorithms were built out of a love of statistics. For most of human history, loans came down to a gut call. Even when credit became institutionalized, the information collected by companies (including a precursor to Equifax) was shockingly subjective: Firms recorded things like race, political affiliations, [sex lives]( cleanliness, and [drinking habits]( to decide who got a loan and how much it would cost. (Just for example: One credit reporter noted that “prudence in large transactions with all Jews should be used,” [according to Time]( the 1940s, borrowing in the US meant talking to a white guy who was likely wearing blue suit and a red tie, [ZestFinance]( founder Douglas Merrill says. It was easier to get approved if your children played football with the banker’s kids. That left out a lot of people. In the 1950s, Fair and Isaac were[developing techniques for modeling predictive behavior.]( Transistors turbocharged their calculations. They proved their system—and their statistics—could predict whether a person would pay on time. And age, sex, and race weren’t used in the calculation.But it wasn’t until 1989 that the major reporting agencies sought out Fair, Isaac and Company (FICO) to develop an industry standard. Take-up at first was slow: Computers weren’t widespread and lenders clung to their prejudices. It wasn’t until the 1970s that legislation barred discriminatory factors from the credit equation. Today, FICO counts 95% of the largest US financial institutions as its clients. Take me down this🐰 hole [Read Time’s extremely in-depth history of the credit reporting industry.]( FYI That's hot --------------------------------------------------------------- Are credit scores a better way to find love than swiping photos? People who use CreditScoreDating.com evidently think so. And some industry research suggests they’re onto something. About 58% of online daters say a solid credit score is hotter than driving a nice car, according to a survey by Discover and Match Media Group, the parent company of Tinder. Some 50% said it’s more attractive than an impressive job title. [Dr. Helen Fisher]( chief scientific advisor for online dating service Match.com, [told Bloomberg]( that credit scores are a “Darwinian mechanism for measuring your reproductive ability.” Origin story: Redux The facts about Equifax --------------------------------------------------------------- This year’s snafu wasn’t the first time Equifax found itself at the center of a controversy. The company goes way back: It started in Atlanta as Retail Credit Company in 1899. During the next 60 or so years, RCC collected files on millions of Americans, including data on consumers’ [social lives, political preferences, and sexual proclivities](. The company was already controversial, but its plans in the 1960s to computerize records—stoking fears that people would never be able to escape their past—was a step too far. A public backlash helped bring about reforms like the [Fair Credit Reporting Act]( in 1970, which forced the bureaus to open their files to the public and remove data after a period of time. Following the controversy, RCC changed its name to Equifax in 1975. how it works Does FICO collect your data? --------------------------------------------------------------- Nope! The big credit bureaus like Equifax, Experian, and TransUnion [take care of that part](. FICO hones its algorithms by training them with de-identified data. Then it packages these secret algorithms into software that’s sold to the credit bureaus, who use it to calculate the credit score using the data they’ve collected from credit card companies, banks, and credit unions. The algorithms have evolved and become more complex, but the basic statistical approach still has its roots in Fair and Isaac’s work in the 1950s. Here’s a look at what goes into your score: The [information]( includes things like how many times lenders have requested information about you and how many times your accounts have been turned over to a collection agency. A foreclosure, for example, will affect your score for [seven years]( but its impact on your rating can ease within two years. A single black mark won’t necessarily torpedo your chance at getting a decent loan. DIY Meet the obsessives --------------------------------------------------------------- FICO [scores range]( from 300 to 850, and these days more and more Americans are [achieving perfection,]( according to Bloomberg. The average for the US has climbed to 700, a little higher than the previous peak in October 2006, which presaged the credit meltdown two years later. “Super-prime” consumers—those with scores of 800 or higher—have steadily increased since 2010. About 1.4% have achieved FICO perfection. One reason why scores have increased is probably because incomes have increased relative to overall debt burdens. But consumers are also getting better at gaming the number. “Members of the 850 Club can be broken into two groups,” [writes Suzanne Woolley.]( “There are the super-knowledgeable tacticians trying to crack scoring algorithms, and the naturally prudent. Some are prepping for a loan. Others are just credit-score hobbyists.” Watch This! Enter the Monopoly Man --------------------------------------------------------------- Former Equifax CEO Richard Smith was getting ready to answer senators’ questions in Washington this past October when the Monopoly Man stole the show. (The moustachioed hero [was reported to be]( Amanda Werner of the campaign groups Americans for Financial Reform and Public Citizen.) Equifax is really more of an oligopoly than a monopoly, but that doesn’t make for much of a visual metaphor. mo 💸 mo problems Bad credit? --------------------------------------------------------------- FICO isn’t foolproof: Low credit scores [generally mean bigger down payments and higher interest rates for consumers]( placing even greater pressure on people who are poor or who simply lack credit history. Banks determine their own lending policies and aren’t always prudent (see [the 2008 financial crisis](. And minorities are still [channeled into more expensive loans]( far too often. you are (still) your data The credit of tomorrow --------------------------------------------------------------- Competitors are hard at work trying to best Fair and Isaac’s algorithms. ZestFinance tries to identify good borrowers that FICO overlooks, such as very recent immigrants and younger people who don’t have a lot of credit history. Non-traditional signals include whether an applicant types in all capitals, lowercase, or regular case (regular case is the most creditworthy). New types of data are seeping into credit scores around the world: Last year, FICO rolled out credit scores in Russia, China, and India using new sources of data like utility bills and cell phone payment data to expand its product [to unbanked or underbanked people](. [WeLab]( a startup with online lending platforms in Hong Kong and China, makes assessments using online data like bill payment records and social media profiles. The company says it has 25 million users and has processed [$28 billion of loans]( since it was founded four years ago. And FICO isn’t standing still: [It just announced a program]( for AI developers to take a portion of the company’s data and build a new, more transparent algorithm to predict whether customers would be able to repay a line of credit up to $150,000. But deep learning, the popular flavor of AI that allows Google to translate languages and master board games, may be challenging because it’s not always clear why a decision has been made. There are some more dystopian futures looming: China has also created a [“social credit”]( system that dings people who violate social norms and laws—like saying things they shouldn’t in internet chat groups. And Facebook [secured a patent in 2015]( that would allow creditors to judge your likelihood to repay debts based on the credit ratings of the people in your social network. That could [reduce people’s chances at upward mobility]( if their friends and families have bad credit scores. Poll Are you proud of your credit score? [Click here to vote]( It's the first thing I mention on a dateIt's the first thing on my New Year's resolution listCan we talk about the weather instead? the fine print In yesterday’s poll about [Pantone’s Ultra Violet,]( 44% of you said “I miss Prince 😞.” Today’s email was written by[John Detrixhe.]( Images: Reuters/Aaron P. Bernstein (Monopoly Man), Reuters/Wolfgang Rattay (ATM machine), Reuters/Dado Ruvic/Illustration (Equifax) Enjoying the Quartz Obsession? [Send this link]( to a friend! Not enjoying it? No worries. [Click here]( to unsubscribe. Quartz | 675 Avenue of the Americas, 4th Fl | New York, NY 10011 | United States Share this email