FICO 08 Promises to Better Predict Defaults

With the current FICO scoring algorithm having been originally released in 2002, it has been due for an overhaul. Now, the new version, dubbed FICO 08, is set to finally be rolled out soon.

Same “look and feel”
The new FICO score will look the same to both lenders and consumers. According to Fair Isaac, creator of the score, it will share the same:

• 300-850 score range
• Reason codes
• Minimum scoring requirements
• Inquiry de-duplication treatment
• Consistent score-to-risk alignment

Under the hood, the new algorithm will seek to do a better job at predicting the likelihood of default by addressing a couple of key areas:

Protecting from “piggybacking” abuse
As previously detailed, credit scoring “piggybacking” allowed people with bad credit to leverage the payment histories of those with good credit by becoming authorized users on their accounts. Unfortunately, many credit repair companies began abusing this loophole, causing scores to lose their predictive value. FICO 08 aims to stem this abuse, while still allowing legitimate authorized users, such as spouses, to benefit.

Better predictor for consumers with subprime credit
Fair Isaac claims that FICO 08 can improve the predictive performance of subprime borrowers by 5-15%. Fair Isaac attributes the increased accuracy to increasing the number of customer segments from 10 to 16, evaluating the “degree of ‘bad’ behavior…over the 24 months following scoring relative to ‘good’ behavior”, and eliminating the effects of minor delinquencies, such as parking tickets or library fines.

Customer testing for FICO 08 is scheduled to be available at TransUnion by the end of January 2009, and at Equifax by the second quarter of 2009.