Vision Credit Education, Inc.

The biggest update to FICO-based credit scoring in years faced opposition from credit bureaus that had hoped to push their own jointly developed scoring model. However, lenders and consumers pushed for the newest and most accurate FICO based products rather than risk relying on the unproven VantageScore products. Experian has finally agreed to adopt FICO 08 changes even though it is still involved in a bitter dispute with Fair Isaac.

What is FICO 08?

A sweeping update to FICO based credit scoring models became known as FICO 08 given that it was being rolled out to credit bureaus in 2008. However, credit bureaus were reluctant to adopt the changes. The reason was that they were trying to promote their own VantageScore products as a way for reducing their reliance on Fair Isaac.

Why Was FICO 08 Needed?

Fair Isaac Corporation was under pressure from lenders to make improvements to FICO scoring models. Much of this pressure was due to rampant gaming of the system by borrowers that were artificially inflating their credit scores.

By getting listed on a seasoned account held by a complete stranger, a borrower could gain many points on their credit scores when the lender reported the authorized user account to credit bureaus. FICO 08 served to limit such practices, which became known as piggybacking.

FICO 08 resolves 2 related needs. Lenders needed to adequately evaluate borrower risk by eliminating obvious and artificial means of inflating scores. Consumers still needed to be able to help an immediate relative, such as a spouse or child, by extending credit as an authorized user. FICO 08 preserves this opportunity while curbing abusing piggybacking practices.

FICO 08 also recognized that consumers were being harshly punished for a single delinquency that could have been a mere oversight or lost payment rather than an indicator of financial distress. A single late payment now has a milder negative impact. Conversely, multiple and severe delinquencies will have a more detrimental impact on credit scores.

Experian Last to Adopt FICO 08

With Equifax and TransUnion each updating their scoring models to include FICO 08 changes, Experian was forced to follow in their footsteps. Lenders had spoken and they wanted the updated scoring products. Experian faced being the “odd man out” by failing to include the changes.

Experian’s conversion to the FICO 08 scoring update became effective on August 1, 2009. This was a significant event for Experian given their legal challenges to Fair Isaac over the past couple of years.

What we are finding is that market forces determine what credit bureaus have to offer. If the lenders all voice their desire for a certain product, then the credit bureaus must comply in order to remain competitive. Otherwise, they face being cut out by the bureaus that meet lender demands.

What we do not know is if this will sign a future death warrant for VantageScores, or if credit bureaus will remain vigilant in their efforts to break away from Fair Isaac. What we do know is that Fair Isaac has at least bought more time as it further cements itself as the leader in risk scoring of consumer credit.