FICO® Score Fundamentals
Julie Wooding
Solution Consulting, Principal Consultant
FICO
© 2014 Fair Isaac Corporation. Confidential.
This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Hear answers to your questions
about the FICO® Score
2
© 2014 Fair Isaac Corporation. Confidential.
FICO® Scores—Expertise
► FICO™
pioneered credit bureau scoring modeling technology
► FICO
has partnered with all five major credit bureaus in the United States and Canada
► More
than 150 billion FICO® Scores have been sold to date
► Powers
10 billion+ decisions a year
► 70,000+
► FICO®
businesses rely on FICO® Scores
Scores enhance decision-making
►
Across lenders of all credit industries
► Across various decision points such as approval/denial, marketing and portfolio management
► Use
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of FICO® Scores has expanded into non-traditional markets such as rating agencies
© 2014 Fair Isaac Corporation. Confidential.
Agenda
►Scoring
►Inside
Basics
the FICO® Score
►Setting
Score Cutoffs
►FICO®
Scores Across the World
►FICO
Score 9: A Preview
►FICO’s
4
Model Management Program
© 2014 Fair Isaac Corporation. Confidential.
Scoring Basics
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© 2014 Fair Isaac Corporation. Confidential.
Concepts of Scoring
Credit Risk Scoring
► A statistical
process
► Convert
into a numerical score
information from:
► Credit
applicants
► Existing accountholders
► This
score is regarded as a measure
of the credit risk (i.e., the probability
of repayment)
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© 2014 Fair Isaac Corporation. Confidential.
Scoring Definitions
► Scorecard:
► Mathematical
model used to assess credit risk
► Odds:
► Is
the ratio of one event to another
► In credit scoring it is defined as the ratio of goods to bads
Example: Good/bad odds of “4 to 1” (also 4:1)
► Of 5 applicants approved, approximately 4 are likely to be good payers,
1 is likely to be a bad payer
► Bad definitions may differ for different types of models
►
► It
is a measure of risk
► For FICO® Scores, it represents the probability of future delinquency
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© 2014 Fair Isaac Corporation. Confidential.
Scoring Definitions
► Characteristic
► A question
about the credit bureau report
► Examples:
►
Number of bankcards
► Number of 90+ day delinquencies
► Attribute
► Answer
given by credit bureau report
► Examples:
►
Number of bankcards = 3
► Number of 90+ days delinquencies = 2
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© 2014 Fair Isaac Corporation. Confidential.
Types of Scores
Credit
Scores
Non-Risk
Scores
Risk Scores
Credit BureauBased Scores
(FICO)
9
Application
Scores
© 2014 Fair Isaac Corporation. Confidential.
Non-Credit
Scores
Behavior
Scores
Attrition
Response
Revenue
Scores Are Designed to Rank Order
“Odds quote” based on the
general population—
not necessarily applicable to
any one lender.
680
660
Specific lender's applicants
will still “rank order”.
640
620
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© 2014 Fair Isaac Corporation. Confidential.
FICO® Score Models in Place at All Major US and
Canada Credit Reporting Agencies
A model is developed
separately on each CRA’s
data to maximize predictive
power on unique data
elements available
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© 2014 Fair Isaac Corporation. Confidential.
What Is in a Consumer Credit File?
► Inquiries
► Mortgage
Update
► Home
Equity Loan Update
► Public
Record Data
► Bankcard
► Auto
Update
Loan Update
► Department
12
Store Update
© 2014 Fair Isaac Corporation. Confidential.
Sample Credit Report
“The Five Information Zones”
1
2
3
4
5
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© 2014 Fair Isaac Corporation. Confidential.
The Relationship “Connection”
Consumers
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© 2014 Fair Isaac Corporation. Confidential.
Credit Grantors
Credit Bureau Risk Score Products—US
Product
Classic FICO®
Score
► FICO®
Risk Score, Classic
► FICO® Auto
Classic FICO® Industry
Scores
Score
► FICO® Bankcard
► FICO® Mortgage
NextGen FICO®
Score
► FICO®
FICO® Economic Impact
Index
15
Score
Risk Score, NextGen
—
Bankruptcy Model
FICO® Credit Capacity
IndexTM
Score
► FICO® Credit
Capacity Index
► FICO® Economic
© 2014 Fair Isaac Corporation. Confidential.
Impact Index
► FICO®
Risk Score
► FICO® Risk
Score, Classic Auto
► FICO® Risk
Score, Classic
Bankcard
► FICO® Mortgage
Score
► FICO®
Risk Score, Classic
► FICO® Auto
Score
► FICO® Bankcard
Score
► FICO® Mortgage
Score
► FICO®
Risk Score, NextGen
► FICO®
Risk Score, NextGen
► FICO®
Bankruptcy Risk Score
► FICO®
Bankruptcy Score
—
—
—
—
Inside the FICO® Score
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© 2014 Fair Isaac Corporation. Confidential.
The FICO® Score is a summary of the
information on a consumer’s credit file.
It is a single 3-digit number ranging from 300–850
which rank-orders consumers according to risk.
Higher scores equate to lower
future risk of default.
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© 2014 Fair Isaac Corporation. Confidential.
Predictive Characteristics
Library of
800+
characteristics
Core group of
40 most predictive
characteristics
Develop final scorecards
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© 2014 Fair Isaac Corporation. Confidential.
Predictive Characteristics
Considered




Trade lines
Inquiries
Collections
Public Records
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© 2014 Fair Isaac Corporation. Confidential.
Not Considered





Age
Address
Employment
Income
Gender
Development Data
Scoring date
Bureau Snapshot
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© 2014 Fair Isaac Corporation. Confidential.
2 years
Performance date
Bureau Snapshot
FICO® 8 Score Segmentation
Enhanced Core System—US
Credit Bureau File
Presence of
Serious Delinquency/
Derogatory Items ?
No
8 Non-Derogatory
Scorecards
►
Thickness of file
►
Age of file
►
Recency of new
openings
Yes
4 Derogatory
Scorecards
7
8
6
4
5
3
4
3
2
2
1
1
Return Final
FICO® 8 Score
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© 2014 Fair Isaac Corporation. Confidential.
Return Final
FICO® 8 Score
►
Public record
►
Worst rating
Five Categories of FICO® Score
Predictive Characteristics
5.
Credit
4.
Mix
Pursuit of 10%
New Credit
10%
3.
Credit History
Length
15%
1.
Payment History
35%
2.
Outstanding Debt
30%
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© 2014 Fair Isaac Corporation. Confidential.
1. Payment History
Key Factors
► How
recent is the most recent delinquency,
collection or public record item?
► How
severe was the worst delinquency—
30 days, 90 days?
► How
many credit obligations have been
delinquent?
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© 2014 Fair Isaac Corporation. Confidential.
1.
Payment
History
35%
Payment History
Example
Risk
High
Low
0–11
12–23
24–35
36–47
48–High
Months Since Most Recent Major Delinquency
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© 2014 Fair Isaac Corporation. Confidential.
No Delq
2. Outstanding Debt
Key Factors
► How
much does the consumer owe creditors?
► What
percentage of available credit card limits
is the consumer using?
► What
percentage is outstanding on open
installment loans?
2.
Outstanding Debt
30%
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© 2014 Fair Isaac Corporation. Confidential.
Outstanding Debt
Example
Risk
High
Low
0–19%
20–39%
40–59%
60–79%
80–99%
Ratio of Total Balances to
Total Limits on Revolving Accounts
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© 2014 Fair Isaac Corporation. Confidential.
100+%
3. Credit History Length
Key Factors
► How
long have accounts been established—
average number of months accounts have
been open
► New
accounts—number of months since
most recent account opening
3.
Credit History
Length
15%
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© 2014 Fair Isaac Corporation. Confidential.
Amount of Credit History
Example
Risk
High
Low
28
0–23
© 2014 Fair Isaac Corporation. Confidential.
24–47
48–71
72–119
Number of Months Since
Oldest Revolving Account Opening
120+
4. Pursuit of New Credit
Key Factors
► Inquiries:
Number of recent inquiries
(12 months)
► New
accounts—number of trade lines
opened in last year
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© 2014 Fair Isaac Corporation. Confidential.
4.
Pursuit of
New Credit
10%
Pursuit of New Credit
Example
Young/Thin files
Mature/Thick files
Risk
High
Low
0
1
2
Number of Inquiries
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© 2014 Fair Isaac Corporation. Confidential.
3
4–High
Types of Inquiries
► FICO®
Scores only consider consumer-initiated inquiries for credit posted
in the last 12 months
► FICO®
Scores do not consider the following inquiries:
► Promotional
inquiries
► Account review inquiries
► Consumer disclosure inquiries
► Insurance inquiries
► Employment inquiries
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© 2014 Fair Isaac Corporation. Confidential.
Inquiry De-Dupe Logic
► The
FICO® Score models observe inquiries over a 12-month period
► Auto-,
mortgage-, and student loan-related inquiries that occur 30 days prior to
scoring have no effect on the score. Outside this 30-day period, auto-, mortgage-,
and student loan-related inquiries that occur within any 45-day period are treated
as a single inquiry
12 Months
Scoring Date
***
45 day de-dupe
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© 2014 Fair Isaac Corporation. Confidential.
**
30 day buffer
Inquiry De-Dupe and Buffer Period
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Type
# of Days Ago
Auto
8
Auto
9
Auto
17
Mortgage
35
Mortgage
47
Mortgage
56
Mortgage
79
Dept. Store
90
© 2014 Fair Isaac Corporation. Confidential.
Not Counted
(Ignore within 30 days)
Counted as 1 Inquiry
(De-dupe within 45 days)
Counted as 1 Inquiry
5. Credit Mix
5.
Credit Mix
10%
Key Factors
► What
is the mix of credit product types?
► Revolving
credit—number of bankcard
trade lines
► Installment
credit—percent
of trade lines that are installment loans
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© 2014 Fair Isaac Corporation. Confidential.
Minimum Scoring Criteria—US
► Not
deceased
► One
trade line open at least 6 months
► One
undisputed trade line updated in last 6 months
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© 2014 Fair Isaac Corporation. Confidential.
FICO® Score Reasons Codes (Score Factors)
to four reasons returned (plus a 5th
related to inquiries, if necessary)
► Up
► Selection
and order based upon
difference from maximum points
► Reasons
returned on-line and in account
management runs
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© 2014 Fair Isaac Corporation. Confidential.
Example FICO® Score Reason Computation
Characteristic
Number of bank card trade lines
Number of trade lines with balance >0
Number of months in file
Number of months since most recent bankcard opening
Number of months since most recent derogatory public record
Attributes
0
1
2
3
4 or more
0–1
2
3–4
5–7
8+
Below 12
12 to 23
24 to 47
48 or more
0 to 5
6 to 11
12 to 17
18 to 23
24 or more
No public Record
0 to 5
6 to 11
12 to 23
24 or more
Boxed numbers represent the maximum points possible (*) minus the actual points received.
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© 2014 Fair Isaac Corporation. Confidential.
Points
15
22
30
40*
30
65*
55
50
40
30
12
35
60
75*
20
25
30
38
45*
75*
10
15
25
45
10
#4
15
#3
40
#1
25
#2
0
Setting Score Cutoffs
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© 2014 Fair Isaac Corporation. Confidential.
Cut-off Score Selection
► Setting
► Two
a cutoff when using a new score can be challenging
pieces of information are required:
► Volume
distribution: how the applicant population will distribute on the new score
► Performance: how the new accounts are expected to perform on the new score
► Lenders
will have required data:
► If
adopting a new custom score
► If they performed a retrospective validation
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© 2014 Fair Isaac Corporation. Confidential.
FICO Validation Odds Chart
An Approach to Setting Cutoffs
FICO® Score
► This
chart provides both
required items:
► Distribution
of applicants
(a proxy)
► Associated performance
(an estimate)
► Lenders
can use the odds
chart to determine initial
cutoffs
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© 2014 Fair Isaac Corporation. Confidential.
Validation Odds Chart
Score
Range
<500
500-519
520-539
540-559
560-579
580-599
600-619
620-639
640-659
660-679
680-699
700-719
720-739
740-759
760-779
780-799
800+
TOTAL
# Goods
# Bads
4,325 3,510
3,431 2,035
4,769 2,435
6,823 2,964
9,153 3,372
11,729 3,558
14,671 3,343
18,067 3,079
21,733 2,802
23,865 2,210
25,394 1,636
27,020 1,150
27,548
744
28,006
473
28,512
282
29,515
161
55,493
145
340,054 33,898
# Total
% Pop
7,835
5,466
7,204
9,787
12,525
15,288
18,014
21,145
24,535
26,075
27,030
28,170
28,292
28,479
28,794
29,676
55,638
373,952
2.1%
1.5%
1.9%
2.6%
3.3%
4.1%
4.8%
5.7%
6.6%
7.0%
7.2%
7.5%
7.6%
7.6%
7.7%
7.9%
14.9%
100.0%
Observation Date: June 2012
Performance Date: June 2014
Descending
Interval Bad
Interval
Cumulative
Rate
Odds
Bad Rate
44.8
9.1
1.2
37.2
8.3
1.7
33.8
7.9
2.0
30.3
7.3
2.3
26.9
6.7
2.7
23.3
5.9
3.3
18.6
5.1
4.4
14.6
4.3
5.9
11.4
3.5
7.8
8.5
2.7
10.8
6.1
2.0
15.5
4.1
1.5
23.5
2.6
1.1
37.0
1.7
0.7
59.2
1.0
0.5
101.1
0.5
0.4
183.3
0.3
0.3
382.7
9.1
9.1
10.0
Descending
Cumulative
Odds
10.0
11.0
11.7
12.6
14.0
15.9
18.7
22.5
27.8
36.1
48.3
66.4
93.7
133.5
193.1
277.8
382.7
10.0
Descending Score Distribution
Gives information about applicants scoring
ABOVE a given score: the potential ACCEPTS
350 400 450 500
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© 2014 Fair Isaac Corporation. Confidential.
550 600 650
700 750 800 850
Setting Cutoff for a New Score
► A lender
► Option
will set their cutoff based on their risk appetite
1: Cumulative projected bad rate of approved population
FICO® Score
Validation Odds Chart
Score
Range
…
620-639
640-659
660-679
680-699
700-719
…
TOTAL
42
# Goods
# Bads
…
…
18,067 3,079
21,733 2,802
23,865 2,210
25,394 1,636
27,020 1,150
…
…
340,054 33,898
© 2014 Fair Isaac Corporation. Confidential.
# Total
% Pop
…
21,145
24,535
26,075
27,030
28,170
…
373,952
…
5.7%
6.6%
7.0%
7.2%
7.5%
…
100.0%
Observation Date: June 2012
Performance Date: June 2014
Descending
Interval Bad
Interval
Cumulative
Rate
Odds
Bad Rate
…
…
…
14.6
4.3
5.9
11.4
3.5
7.8
8.5
2.7
10.8
6.1
2.0
15.5
4.1
1.5
23.5
…
…
…
9.1
9.1
10.0
Descending
Cumulative
Odds
…
22.5
27.8
36.1
48.3
66.4
…
10.0
Setting Cutoff for a New Score
► A lender
► Option
will set their cutoff based on their risk appetite
2: Marginal bad rate or odds of highest risk approved applicant
FICO® Score
Validation Odds Chart
Score
Range
…
620-639
640-659
660-679
680-699
700-719
…
TOTAL
43
# Goods
# Bads
…
…
18,067 3,079
21,733 2,802
23,865 2,210
25,394 1,636
27,020 1,150
…
…
340,054 33,898
© 2014 Fair Isaac Corporation. Confidential.
# Total
% Pop
…
21,145
24,535
26,075
27,030
28,170
…
373,952
…
5.7%
6.6%
7.0%
7.2%
7.5%
…
100.0%
Observation Date: June 2012
Performance Date: June 2014
Descending
Interval Bad
Interval
Cumulative
Rate
Odds
Bad Rate
…
…
…
14.6
4.3
5.9
11.4
3.5
7.8
8.5
2.7
10.8
6.1
2.0
15.5
4.1
1.5
23.5
…
…
…
9.1
9.1
10.0
Descending
Cumulative
Odds
…
22.5
27.8
36.1
48.3
66.4
…
10.0
Setting Cutoff for a New Score
► A lender will set their cutoff based
► Option 3: Breakeven point—for example
►
►
on their risk appetite
Average good = $200 revenue, Average bad = $2,160 loss
Breakeven point would be where odds of highest risk applicants equal “breaking even”, at 660–679, expect 10.8
goods for every bad: 10.8 x $200 = $2,160
FICO® Score
Validation Odds Chart
Score
Range
…
620-639
640-659
660-679
680-699
700-719
…
TOTAL
44
# Goods
# Bads
…
…
18,067 3,079
21,733 2,802
23,865 2,210
25,394 1,636
27,020 1,150
…
…
340,054 33,898
© 2014 Fair Isaac Corporation. Confidential.
# Total
% Pop
…
21,145
24,535
26,075
27,030
28,170
…
373,952
…
5.7%
6.6%
7.0%
7.2%
7.5%
…
100.0%
Observation Date: June 2012
Performance Date: June 2014
Descending
Interval Bad
Interval
Cumulative
Rate
Odds
Bad Rate
…
…
…
14.6
4.3
5.9
11.4
3.5
7.8
8.5
2.7
10.8
6.1
2.0
15.5
4.1
1.5
23.5
…
…
…
9.1
9.1
10.0
Descending
Cumulative
Odds
…
22.5
27.8
36.1
48.3
66.4
…
10.0
Setting Cutoff for a New Score
► A lender
may use a combination of all three options, setting their cutoff based on
their risk appetite as well as the revenue and profit implications
► Cutoffs
should be set considering:
► Anticipated
applicant distribution
► Desired approval rate
► Risk inherent in proposed approved population
► Expected losses, revenue, and profit from proposed strategy
► Subsequent
► Start
45
observing and tracking of performance is critical
basic, refine strategies based on observed performance
© 2014 Fair Isaac Corporation. Confidential.
FICO® Scores Across the World
46
© 2014 Fair Isaac Corporation. Confidential.
FICO® Scores for International Markets
GREENLAND
ALASKA (USA)
SWEDEN
ICELAND
RUSSIAN FEDERATION
FINLAND
NORWAY
CANADA
ESTONIA
LATVIA
DENMARK
LITHUANIA
REPULIC OF
IRELAND
UNITED
KINGDOM
NETHERLANDS
BELGIUM
BELARUS
GERMANY
POLAND
CZECH
REPUBLIC
UKRAINE
SLOVAKIA
AUSTRIA
FRANCE
SWITZ.
KAZAKHSTAN
HUNGARY
UZBEKISTAN
BULGARIA
PORTUGAL
MONGOLIA
ROMANIA
ITALY
GEORGIA
KYRGYZSTAN
SPAIN
NORTH
KOREA
GREECE
TURKEY
UNITED STATES of AMERICA
TURKMENISTAN
SYRIA
LIBYA
NEPAL
EGYPT
SAUDI
ARABIA
MEXICO
CUBA
UAE
OMAN
TAIWAN
INDIA
VIETNAM
MYANMAR
MAURITANIA
MALI
NIGER
SUDAN
SENEGAL
GUINEA
COSTA RICA
PANAMA
THAILAND
YEMEN
LIBERIA
GUYANA
NIGERIA
COLOMBIA
COTE
D’IVOIRE
CAMEROON
FRENCH
SURINAME GUIANA
ETHIOPIA
GABONCONGO
ECUADOR
MALAYSIA
SOMALIA
TANZANIA
PAPUA
NEW GUINEA
INDONESIA
ANGOLA
ZAMBIA
BOLIVIA
MADAGASCAR
ZIMBABWE
NAMIBIA
PARAGUAY
FICO® Score Capable
KENYA
DEMOCRATIC
REPUBLIC OF
CONGO
BRAZIL
PERU
FICO® Score Available at Credit Bureau
SRI
LANKA
CENTRAL
AFRICAN REPUBLIC
UGANDA
FICO® Score Deployed
PHILIPPINES
CAMBODIA
BURKINA
GHANA
VENEZUELA
LAOS
CHAD
NICARAGUA
FICO Score Deployment Legend
JAPAN
PAKISTAN
ALGERIA
WESTERN SAHARA
GUATEMALA HONDURAS
SOUTH
KOREA
CHINA
AFGHANISTAN
IRAN
IRAQ
TUNISIA
MOROCCO
TAHKISTAN
BOTSWANA
AUSTRALIA
URUGUAY
CHILE
REPUBLIC
OF SOUTH
AFRICA
ARGENTINA
Credit Information Legend
Positive & Negative Data Sharing
Negative-only Data Sharing
No Data Sharing
Source: World Bank. 2013. Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises.
Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9984-2. License: Creative Commons Attribution CC BY 3.0
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© 2014 Fair Isaac Corporation. Confidential.
NEW
ZEALAND
FICO® Scores Family—International
FICO® Score for lenders
FICO® Score at Bureaus
►
►
►
►
►
►
►
►
►
►
ICB—Ireland
I-Score—Egypt
ACSP—Brazil
Benefit Co.—Bahrain
Biroul de Credit—Romania
CBS—Singapore
NBKI—Russia
Trans Union—South Africa
SIMAH—Saudi Arabia
Circulo de Credito—Mexico
►
Japan
► Mexico
► Panama
► Peru
► Poland
► Sweden
► Taiwan
► Thailand
► Turkey
FICO® Scores are feasible in any country
with recognizable bureau data.
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© 2014 Fair Isaac Corporation. Confidential.
FICO® Scores for International Markets
► FICO®
Score developed following same design principles, where data allows
► Development
approach strives to maintain similar five categories of predictive
variables
► Unique
data elements available in other countries can be incorporated into the
FICO® Score models
49
© 2014 Fair Isaac Corporation. Confidential.
FICO® Score 9: A Preview
50
© 2014 Fair Isaac Corporation. Confidential.
FICO® Score 9 Outperforms
All Prior FICO® Score Versions Across
All Industries and Lifecycle Stages
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© 2014 Fair Isaac Corporation. Confidential.
FICO® Score 9 Summary
► Numerous
changes have occurred since FICO® Score 8 was developed
►
A unique approach to development was required
► New and different treatment of certain items was introduced
► FICO®
Score 9 is:
►
A more predictive score
► Based on current consumer behavior
► Reflective of evolving credit landscape
► Lenders
►
can:
Upgrade to FICO® Score 9 with ease
►
Backward compatibility and limited IT and operational impacts
►
Comply more easily and confidently with relevant US regulations
► Enjoy a stronger, more predictive score to make better decisions
► Learn
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more details in our FICO® Score 9 Showcase!
© 2014 Fair Isaac Corporation. Confidential.
FICO’s Model Management Program
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© 2014 Fair Isaac Corporation. Confidential.
FICO’s Model Management Program
INNOVATION
SAFETY &
SOUNDNESS
COMPLIANCE
On-Going Regulation Assessment
►ECOA and
Reg B
►FCRA plus Dodd-Frank and FACT Act
►FDIC Large Bank Pricing
►GLB
►Basel III
►International regulations
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© 2014 Fair Isaac Corporation. Confidential.
FICO maintains procedural
controls underlying the
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Thank You!
Julie Wooding
jwooding@fico.com
© 2014 Fair Isaac Corporation. Confidential.
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© 2014 Fair Isaac Corporation. Confidential.
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Julie Wooding
jwooding@fico.com
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© 2014 Fair Isaac Corporation. Confidential.