decades, the FICO score has been the dominant metric for
deciding whether a borrower is creditworthy. When a
borrower applies for a mortgage, a car loan or a credit
card, chances are that a FICO score is one of the first
things a lender looks at.
over the last few years, a new breed of online lenders
and credit scoring firms have started developing their
own methods of judging whether a borrower is a good bet.
are focused on consumers who donít have enough
financial track record to have a FICO score. Others
simply believe that they have a better method.
this year, for instance, San Francisco lender Social
Finance said it had dropped FICO from its underwriting
process in favor of its own system, which takes into
account such factors as what a borrower does for a
living or studied in college. Other firms look at even
more unorthodox criteria, including web search queries.
Lansing, chief executive of Fair Isaac Corp., the San
Jose, Calif., company behind the FICO score, said some
of these new ideas might prove out, but others wonít
ó and some are likely to face opposition from federal
spoke with the Los Angeles Times about the new world of
credit scoring and why heís not worried that the FICO
score will fall out of fashion. Hereís an edited
excerpt of that conversation:
Thereís been lots of talk over the last few years
about scoring people based on social media data. Is that
something youíve looked at?
Along with credit scores, we also do predictive analytic
software that lenders use to do (lending) and detect
fraud. And we can incorporate anything the customer
wants. For example, what about a Facebook profile? Is
there anything there thatís useful? It probably has
more value than zero, but not a lot more. If you did a
search for "wasted" in a personís profile,
would that have predictive value? It might, but there
are so many other things that would have more predictive
Is that something customers have actually asked you for,
using social media data?
We have that conversation. No customer has asked us to
do it after a conversation about how little utility it
What is predictive then? What are the factors that
lenders ought to look at?
What we find is, anything that reflects personal
responsibility tends to be highly correlated to your
FICO score. If youíre a good student, a good driver.
Those things tend to be correlated to being a good
credit risk. One thing we donít do: FICO doesnít
look at your income. Itís not focused on how wealthy
Wouldnít it make sense to look at how much someone
makes if youíre planning on lending them money?
Of course you want to know they have the money to pay
you back. You need capacity and you need intent to
repay. If you focus on capacity exclusively, thatís a
recipe for problems. You could have a high income and
blow it all on coke and Ferraris.
So what do you look at?
The FICO score is designed to predict a consumerís
propensity to repay debt. A great thing to look at is
what a consumerís payment history has been in the
past. If theyíve been a good payer in the past, itís
likely theyíll be a good payer in the future.
Credit card repayment history is a big factor for FICO,
but what about people who donít have credit cards?
There are high school graduates, immigrants, other
people about whom less is known. What we do there is we
ask, "Are there other data sets that provide a
window into whether this person is creditworthy or
not?" We designed our FICO XD score specifically
for the purpose of scoring people who were previously
What other data do you look at for FICO XD?
Are you paying utility bills on time? Thatís
predictive. Are you paying your phone bill on time? Thatís
What do you make of firms using things like where you
went to college or what you studied? Is that stuff
Thereís a whole category of things that seem intuitive
but donít really help you. Letís say Stanford
graduates are a good credit risk ó they get good jobs
at a higher rate than others, theyíve done things that
demonstrate good behavior. But does that scale? Even if
you use that to look at thousands and thousands of
students at prestige schools, itís still a small
number of people. The idea works, but itís only useful
for a tiny population. With FICO, you cover a lot of
Between FICO and FICO XD, how many American adults have
some kind of credit score?
Youíre in the 200 million range.
Last month Los Angeles company ZestFinance signed a deal
to build credit scores for Chinese consumers based on
their queries to leading Chinese search engine Baidu. Iím
not sure that would fly in the U.S., but do you think
that information could be useful?
What you use the money for is a little bit predictive as
to whether youíll repay. If you have knowledge of what
the transaction is for, that can have some value. And
if, through search results, you can have a deeper
understanding of a consumer, itís conceivable you
could make a better credit decision.
The FICO score has been around for a long time and
people understand it pretty well. Is that an advantage
you have over some these new scoring systems?
When people say, "How do I improve my FICO?"
the answer is, "Pay your bills on time." Thatís
the lionís share. This is an area where alternative
lenders are going to run into issues. Regulators are
going to say you have to be transparent with your