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widely distributed to lenders by the three national credit bureaus under the brand names: Beacon from Equifax; Empirica from TransUnion; and, the Experian/Fair Isaac Risk Model from Experian. Indeed, there are several versions of the above FICO scores available because some lenders adopt newly developed versions more quickly than other lenders. There are also broad-based credit scores developed by each of the three bureaus and from other third-party developers. There are custom models developed for use by individual lenders. There are also credit score models developed for specific industries, such as the mortgage, automobile, and telecommunications industries. Finally, there are credit scores distributed primarily to the consumer market.

Over the last 40 years credit scoring has become an important part of most credit decisions, such that Fair Isaac believes some form of credit scoring is now used in the majority of consumer credit decisions. A FICO Score is a 3-digit number that tells lenders how likely a borrower is to repay as agreed. To develop the models that generate the credit scores, Fair Isaac analyzes anonymous credit report data to statistically determine what factors are most predictive of future credit performance. Factors that do not have predictive value and factors that by law cannot be used in the credit decision are excluded from consideration. FICO scores use information from consumer credit reports to provide a snapshot of the credit risk at a particular point in time. Scores can change over time, as subsequent credit risk predictions reflect changes in underlying behaviors.

Fair Isaac is a leading developer of insurance risk scores. Over 350 insurance companies use Fair Isaac insurance scores that they obtain through national credit reporting agencies. Although insurance scores utilize credit data, they differ from credit scores in that insurance scores are developed based on insurance premium and loss history and predict future insurance loss ratio relativity. Like credit scores, insurance scores do not consider a person's income, marital status, gender, ethnic group, religion, nationality, or neighborhood, and the scores are applied consistently from one consumer to the next. A strong statistical correlation has been repeatedly demonstrated between credit data and insurance loss ratio,1 and insurance scores have become a valuable component in determining insurability and the rate assigned. Insurers use insurance scores to accelerate their processing for applicants and renewal shareholders, to concentrate their additional underwriting attention on higher-risk individuals, and to better manage operational strategies. Consumers benefit from lower rates. Insurers have stated that 60-75 percent of their policyholders pay lower premiums because of insurance scoring. Fair Isaac has been supportive of the efforts of insurance score users to educate consumers and agents about insurance scoring.2

With Credit Scoring, More People Get Credit, They Get It Faster, and
It's More Affordable

FICO scores mean more people have access to credit. Credit scores allow lenders to better assess their risk and tailor credit for each consumer's needs. FICO scores are used in almost every sector of the Nation's economy: For mortgages, credit cards, auto loans, personal loans, even cell phone service. More people can get credit regardless of their credit history because credit scores allow lenders to safely assess and account for the risk of consumers who have no existing relationship with the lender, who have never entered the lender's branches, and who may have been turned away in the past by other lenders. Lenders use scores not only to evaluate applications, but also to manage the credit needs of existing customers by extending additional credit or helping consumers avoid overextending themselves. FICO scores are also used by lenders and securities firms as to aid securitization of credit portfolios which provides lenders the capital they need to make credit available to more consumers. FICO scores are accepted, reliable,3 and trusted to the point that even regulators including Federal bank examiners, and security rating agencies, use them to help ensure the safety and soundness of the financial system.4

FICO scores mean people get credit faster. "Instant credit" at a retailer, an auto dealer, over the phone, or on the Internet would not be possible without credit scores. Even mortgage loans that used to take weeks can now be done in minutes. Among the tremendous lending advances in the United States over the last decade

1 See, Predictiveness of Credit History for Insurance Loss Ratio Relativities, October 1999; Attachment 1: A Statistical Analysis of the Relationship Between Credit History and Insurance Losses, Bureau of Business Research (McCombs School of Business) at the University of Texas, March, 2003 available at

2 See e.g., Answers to Your Questions About Insurance Bureau Scores, Attachment 2.

3 See Attachment 3, A Clarification of the Consumer Federation of America's Observations About Credit Score Accuracy.

4 See Attachment 4 for examples of Federal agencies that use FICO scores.

has been the streamlining of the lending process, so that credit approvals-not just on credit cards but on installment loans, mortgages, home equity lines of credit, and even commercial loans to small businesses can be made faster with less manual review, less paperwork, and fewer data requests. All of this has occurred while lenders have not only preserved but also strengthened their visibility and control over their risk exposure.

FICO scores mean people pay less for their credit. Scores make credit more affordable by reducing the cost of evaluating applications, reducing loan losses, reducing the cost of managing credit portfolios, reducing marketing costs with prescreening, and cutting the cost of capital with securitization. This efficient flow of credit and capital has a large part to play in the continued robustness of the American economy. By enabling lenders to extend credit quickly while managing their risk, credit reports and scores have made credit more accessible, at lower rates, to more people. Lenders must make a credit decision, and they must predict the future in doing so. Lenders can use a variety of decision making techniques to predict the future, ranging from a simple subjective evaluation of application and credit history information by a loan officer, to predictive technologies, including credit scoring. When a creditor switches from judgmental decisions to scoring, it is common to see a 2030 percent increase in the number of applicants accepted with no increase in the loss rate. Lenders should use all the information that is legally, economically, and efficiently available to make the best and fairest possible decision for each individual with whom they do business. FICO scores, when used properly, make a tremendous contribution in doing just that. FICO scores use only legal data as inputs, and only those factors proven to be predictive of credit risk. Scores are also more consistent from consumer to consumer because they assess the same factors the same way, each time.

Studies have concluded that the same Fair Isaac credit score indicates the same level of risk regardless of the income level of the consumer or whether the consumer resides in an area with a high percentage of minority residents, with differences consistently favoring the low- to moderate-income (LMI) and high minority area (HMA) applicants.5 Those same studies indicate that credit scoring is a far more predictive screen for both the LMI and HMA applicants than is judgmental decision making. Finally, the multiple scorecard systems developed by Fair Isaac and resident at the three main U.S. credit bureaus were proven to be more predictive than a single scorecard developed for the HMA population for the study.

Fair Isaac credit scores transform the economics and efficiency of the credit decision to allow all relevant information to be brought to bear so that no information that is favorable to an individual is omitted from the decision process. Credit scoring scientifically, and therefore fairly, balances and weighs positive information along with any negative information in credit reports. In essence, full positive credit reporting and scoring have "democratized" credit granting-information about all consumers is available to all lenders for a fair evaluation. Scoring has transformed credit granting so that it is no longer simply based on who you know. Financial Education and Consumer Empowerment Depend Upon Actionable Information About the Credit Scores That Lenders Use


When lenders first began using credit scoring, Fair Isaac provided both lenders and regulators the information and training needed for effective score tracking and oversight. Lenders have always been provided with the top four reasons with every credit score, in order of their importance to the score. As credit scoring use has grown, Fair Isaac has responded by providing consumers with the information they need to understand credit scoring and use it to take control of their credit health. Fair Isaac has published consumer booklets on credit scoring since the early 1990's on its own and in conjunction with others such as the FTC. Free information has also been available to consumers at, since its inception. Consumers interested in learning more about their individual score can access to get their own FICO Score, accompanied by the underlying credit report, and a complete explanation of their personal FICO score for $12.95. Fair Isaac has given consumers a place in the credit reporting process by pioneering consumer credit empowerment with its score explanation. Millions of consumers have already taken steps to control their credit lives by using to obtain informative, actionable credit-information services including

5 See, The Effectiveness of Scoring on Low-to-Moderate Income and High Minority Area Populations, a Fair Isaac Paper dated August, 1997, Attachment 5.

the FICO scores that lenders use, and to help improve and protect their overall financial health.

Explanations of Adverse Action

Consumers, by law, are provided with the key reasons behind their score, when those score(s) were a factor in a decision resulting in an adverse action. These reason codes provided with the FICO score can be used by the lender as part of its explanation to the consumer of any adverse action taken and what the consumer can do to improve their outlook for being approved for credit in the future. Evolution of Consumer Credit Score Education

FICO scores first became available commercially from all three national credit reporting agencies in 1991. Prior to the mortgage industry's embrace of credit risk scoring technology in the mid-1990's, U.S. consumers generally were not aware of this business decision tool and it was not as widely used. This started to change in 1995 when Fannie Mae and Freddie Mac approved the use of credit risk scoring by mortgage lenders. Their approval prompted an increasing number of mortgage lenders and mortgage brokers to use credit risk scores in loan underwriting. Other industries began relying more heavily on FICO scores as well, such as auto lenders and bankcard issuers. Through consumers' interaction with brokers and lenders, the public became more aware of credit scores. The news media also began reporting on this as yet relatively unknown lender risk evaluation tool.

Five years ago, market research showed an initiative to educate consumers about credit scoring was likely to fail due to lack of consumer interest. Once the wide use of credit scores made consumers receptive, however, Fair Isaac launched its consumer education initiative that has made it a leader in promoting financial literacy for all consumers.

We believe it is instructive to briefly review the development of consumer credit education to show how Fair Isaac continues to respond to the need for financial literacy as consumers' awareness grows. The one constant has been Fair Isaac's commitment to the disclosure of credit scores in a way that equips the consumer with accurate, actionable information while avoiding the confusion that can be created from a misunderstanding of a complex topic.

Initiative to Demystify FICO Scores

On June 8, 2000, Fair Isaac announced its public disclosure of all the factors used in its FICO credit bureau risk scores. The list was made publicly available on the company's website for free, and remains free and accessible today at / ScoreConsiders.asp.

FICO Guide

By late October 2000, Fair Isaac had developed and launched an online service called FICO Guide. FICO Guide provided a FIĈO score explanation when a lender or broker provided the consumer with his or her FICO score, the accompanying reason codes, and the name of the credit reporting agency that had calculated the score. FICO Guide was developed to offer consumers, and the lenders and brokers who served them, an interim score explanation service. While the Fair Isaac pursued several options for disclosing FICO scores directly to consumers FICO Guide was phased out shortly after Fair Isaac launched its score disclosure and explanation service 5 months later via

The First Online Consumer Service That Provides FICO Scores and Explanation Directly To Consumers

On January 11, 2001, Fair Isaac and Equifax announced their agreement to create the first service that explains and delivers credit scores directly to consumers, accompanied by the underlying Equifax credit report and a score explanation by Fair Isaac. In their announcement, Fair Isaac explained, "We will provide the tools to not only review an individual's credit information, but to help them understand how that data may be analyzed to predict the risk associated with a credit application." The companies began offering their new service online on March 19, 2001. Personalized FICO Score Simulation

On May 21, 2002, Fair Isaac revolutionized consumer credit education when it introduced its FICO Score Simulator on, as a free service for customers who purchase a score explanation service.6 The FICO Score Simulator uses consumers' own credit information and FICO scores to help them see how specific

6 A sample of the FICO Score Simulator is accessible at Samples/Sample_ScoreSimulator.asp?ReportID=1&ProductID=1.

future actions they might take could change their FICO score, and learn what's most important to achieve and maintain good credit health. Consumers can see how their FICO scores would respond to any of a variety of actions ranging from paying all their bills on time for the next month, to declaring personal bankruptcy. Fair Isaac Provides Considerable Free Credit Score Educational Information

As noted above, Fair Isaac provides consumers with free educational information on FICO scoring directly from its website, and in booklet form.7 Free content on includes a weighting of the credit report factors evaluated by the FICO score so that consumers know what events or behavior has the greatest influence on the scores in general. The following is sample of free content, taken directly from

7 See Attachment 6 available free at

8 Accessible at

What's in Your Score

Email This FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your score.

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These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.

Payment History

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)

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Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)

• Severity of delinquency (how long past due)

Amount past due on delinquent accounts or collection items

Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)

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Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)

Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History

Time since accounts opened

Time since accounts opened, by specific type of account

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