Should your credit score give equal weight to where you live and how many phone numbers you have, just like card payment history or the size of your mortgage does? That’s the argument being made by a new credit-scoring firm that has the attention of powerful people in Washington. Here’s how it could all shake out.
Historically, the credit scoring landscape has been fairly immune to change, with Fair Isaacs (Stock Quote: FIC) the single, dominant player in the credit & risk reputation market. FICO is beyond dispute the most widely used credit-scoring model by major U.S. lenders.
The FICO model is long-standing and fairly basic. Key factors have always included the ability to pay your bills on time, how many credit lines you have opened, and what’s left on the balance you owe.
Now, a new credit scoring model is making the rounds in Washington, one that could significantly impact your credit score. The new model, developed by San Diego-based ID Analytics, could augment, but not intentionally replace, the long-standing FICO scoring model. In the ID Analytics offering, which is currently being poked and prodded in test-run mode by some lenders, factors like how many times you’ve moved or how many phone lines you’ve opened could negatively impact your credit score.
The specific tool that ID Analytics is touting is called ID Analytics Credit Optics – tech-speak for a software tool that allows lenders to make credit and risk decisions, as the company’s web site says, “by gleaning insight from information that is not typically included when calculating a traditional credit score. Organizations can immediately reduce losses by combining traditional credit scores with ID Analytics Credit Optics to fine tune credit decision processes."
ID Analytics is touting the credit scoring tool as a "third way" that provides real-time visibility into the "stability" of an individual (hence the weighting given to frequent movers and people who keep jumping in and out of new phone numbers). Traditional credit scores, the company says, "determine credit risk by predicting the willingness and ability to repay debt." But lenders today aren’t fully satisfied with that model, says the company. It’s a dynamic consumer lending environment that calls for a credit scoring calculus that emphasizes the examination of changes to identity risk and credit risk over a sustained period of time.
So, does it work? ID Analytics claims it does. "When used in combination with traditional credit scores at the point of origination," says the company’s web site, "this incremental perspective of risk has proven to eliminate up to 25% of credit losses without reducing the number of accounts booked."
If that’s true, then adding the "stability and sustainability" factors to the FICO mix may attract plenty of attention on the part of lenders, many of whom are faced with mounting challenges in weighing consumer credit in a frequently toxic and hard-to-predict U.S. economy.
But the company may have some powerful connections in Washington, too. A key executive was once a high-level staffer for Calif. Sen. Dianne Feinstein, a formidable and vocal advocate for consumers on credit and lending issues. Consequently, the ID Analytics tool is getting a full review in Washington, where reform is the order of the day after two years of economic anxiety and recession.
As ID Analytics insist, the Credit Optics tool is only a supplement, and not a replacement, for the traditional "willingness and ability to replace debt." But if the model gets any traction in Washington, and among major lenders, the technology may have the momentum to go from "supplemental" to "industry standard" later on down the road.
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