7/9/2023 0 Comments Fico credit scoreOver the past months, the use of certain alternative data in credit scoring has sparked pushback from policy leaders. Transparency is a fundamental component of the FICO Score, yet many alternative models miss the mark. This not only is good business but also is required by various regulations, such as Fair Lending and Fair credit reporting. When a loan request is rejected, the applicant warrants an explanation. However, these plans carry the danger of introducing bias and creating a credit-rating system that is impossible for people to understand and even harder to justify.Ī transparent credit-rating system is essential. These models aim to open the underwriting gate and bring in the credit invisible, the underbanked, or the credit impaired. Other models consider data used in calculating FICO Scores but seek to step outside traditional boundaries with data elements such as college education, social media presence, and previous purchases. While there may be substance, the models rely on hype or unregulated data that might be misleading or unfair. Machine learning shows promise in consumer credit, and there is evidence of artificial intelligence evolving into the space. Such scores can arouse suspicion due to their murky origins. FICO’s transparency contrasts with newcomers to the credit scoring industry, such as UpStart, which uses AI-powered systems that are effectively black boxes in calculating credit scores. Second, the calculation of FICO Scores has been tested for decades and is transparent. First, the data used in computing the scores is straightforward and regulated to ensure it is inherently unbiased against any individual or group. So do a 520 FICO Score and an 800 FICO Score.”įICO’s approach has two key advantages. “No matter the customer’s background, a 660 means the same thing anywhere in the United States, for any borrower. The score creates a relative ranking based on the risk of the account,” Riley said. It does not attempt to bring in casual or social elements. “The FICO Score sticks to the facts that regulators govern. The FICO Score uses the precise sources of information to provide an accurate, consistent, and fair measure that spans all facets of collateralized and uncollateralized consumer credit. The underlying information comes from five data points: loan repayment history, the amount owed, length of credit history, recency of new credit applications, and type of credit history. Since 1989, the FICO Score has relied upon factual data to rank risk, drawing upon information furnished by creditors. Fairness and Objectivity in Credit Scoringįinancial institutions must have accurate metrics to make decisions, control risk, and assess credit quality. To build upon two previous articles that unpack the recent Mercator Advisory Group white paper Credit Scoring, Fintech, and Consumer Loans: Why AI Scoring Models Do Not Replace the FICO Score, PaymentsJournal sat with Brian Riley, director of the Credit Advisory Services Practice at Mercator Advisory Group, to hear more about how the industry-leading FICO credit scores are the most reliable measure of creditworthiness.
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