What is a FICO Score Supposed to do?

What is a FICO Credit Score supposed to do?  It is a very simple question with a very complicated answer.  It’s safe to say that the majority of the answers you find on the “net” with respect to this simple question are at least somewhat wrong.  And, when it comes to the world of FICO scoring…if it’s a little wrong, it’s a lot wrong.  First things first…here’s what FICO scores are NOT designed to do…

1.  Predict Employee Quality – FICO scores being used for employment screening is what I’ve referred to over and over again as the myth of the decade.  Of course we’re now at the beginning of a new decade so I’m going to have to come up with a new way to describe this often inaccurate representation of FICO score usage.  FICO scores are not, have never been, and probably won’t ever be used by employers.  In fact, the unique type of credit report sold by the bureaus for employment screening doesn’t even include a score so it’s practically impossible for it to happen.

2.  Predict Bankruptcy Filings – At least we’re now in the ball park but we’re still a ways away from accurate.  The FICO risk scores that we’re all familiar with are not designed to predict the likelihood that you will file bankruptcy.

3.  Predict Defaults – Again, close but no cigar.  FICO scores are not designed to predict whether or not you will default on any sort of loan obligation.  This is a very common misconception about that magical 3-digit number.

4.  Predict Revenue – You’re getting colder.  The FICO score is a “risk” score, which means it is, in fact, tuned to sniff out elevated credit risk.  Generating revenue is not a “risk” event.   As such, it’s not what your FICO score is designed to predict.  So, what’s the answer…

The FICO risk score is designed to predict middle level delinquencies.  That’s right, your score is an indicator of whether or not you’re going to pay late by 90 days or worse in the 24 months after your credit file is scored on ANY credit obligation.  This is the stated design objective of the FICO risk score (also known as a “Performance Definition.)  So the next time you see your FICO score, which will start happening much more in 2011 thanks to 2 new laws, you’ll know exactly what the 300-850 is predicting.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit contributor for Mint.com, and the author of the “credit rating” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

Categorised in: Credit Report, Credit Score, Getting Credit, Improving Credit, Money & Identity

This post was written by John Ulzheimer