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The Credit Diagnosis from Dr. FICO – Tom Quinn

Editor's Note: We sat down with Tom Quinn, the vice president of Scoring at FICO during FinCon 2017 last October to discuss credit scores and credit basics. Tom has been with FICO for over 20 years in the Scoring Division and has a lot of experience helping consumers try to understand how the credit scores work.

Below is an edited transcript of the interview:

Experian: Doctor, what's the diagnosis on the credit trends that we see?

Quinn: Well, interestingly, one of the things we're seeing is that the average FICO score is increasing over time, and that's due to a couple things. One of the factors causing that is that the Great Recession is about seven years old now, so people have credit delinquencies associated with that event, that are now falling off their credit report. The economy is doing well, more people [are] employed, potentially higher wages, being able to pay down some of their credit, so those two trends seem to be evolving into a higher average FICO score for the population as a whole.

Experian: We get a lot of questions about alternative data that could go into credit scores. Can you talk to us about that topic, related to FICO, and what you guys are doing?

Quinn: There's a part of the population that is kind of credit excluded, if you wanna think of it that way, where they don't have mainstream information in the big three credit reporting agencies. Our approach has been to see if we can find somewhat alternative information that's maybe not being captured by the three big reporting agencies, and bring that into a scoring system that will kind of look, taste, and feel like a FICO score, in terms of the range, and the odds of score relationship. Some of that information can include how you manage your checking account, how you pay your utilities, et cetera, that is reflective and predictive of credit behavior but is not captured by the credit reporting systems in the traditional manner of today.

Experian: As the credit industry starts to evolve, and look at transaction data, and alternative data, will FICO score reflect inclusion of this data?

Quinn: Whether it's a credit card, or your rent, or your utilities, paying those bills as agreed, on time, is what's going to be looked at by a lender favorably. When they're evaluating your credit, that naturally parlays into a scoring system that is usually very predictive. If you pay non-traditional credit on time, in addition to your normal credit on time, than that points toward a lower-risk consumer.

Experian: Income is not a factor to your credit score. If you are earning a lower salary, you can still earn a high FICO score, right?

Quinn: That's true. That's one of the fallacies out there, that people think, "If I make a lot of money, I have a great score. If I don't make a lot of money, I have a low score." I used to handle customer call questions in my team, and I'll never forget one time where I was speaking with a lawyer, and he was applying for a mortgage. His score was low, and he kept communicating that he had a high six-figure salary. He said he would definitely make it worthwhile, if I would fix the score, so that he could have a higher score. I said, "Well, as interesting as that may seem, that's nothing we can do. We let the data tell us what the point assignment should be. But maybe you should take some of that income you're getting, and pay your bills."

Because he had a huge amount of credit card debt, and was highly leveraged. I found that very interesting, because, here's someone who's making a lot of money, probably lives in a very nice neighborhood, he had a BMW and everything, but he didn't manage it [credit] accurately. Versus someone who is not making a lot of money, but is very frugal and diligent in their management of [money], saves or doesn't overextend [themselves], and they could have a great score, in the upper 700s.

"That's a great opportunity for people who are low-income consumers, to potentially get access to credit, which maybe would be able to help them build some wealth, through homeownership for example."

Experian: Do you have any funny or really interesting questions that people have asked you, once they learn what you do?

Quinn: I do remember one time I was in my office and our front desk person called and said, "Tom, you have a big package up at the front desk. Can you come get it?" So I go, "Well, that's interesting, I'm not expecting anything." I got up there, and it was a big paper ream box. I looked at the address and said, "I don't know anybody in Oklahoma."

I took it back to my desk, opened it up, and someone sent me 10 years of their tax returns. They owned their own small business, and sent me all their small business paperwork, their marriage certificate, just a ton of personal information. They were not happy with their score and they wanted to make sure that all of their assets were being understood. I immediately called the customer, and said, "This is not very wise, to provide this amount of personal information to anybody. So I'm going to ship it back to you, and just let you know, we haven't done anything."

Then I went on to talk to him about his score, and his report, and everything. It was a reminder that people don't necessarily think through all of the consequences of an action they're taking, because they're so focused on one particular element.

Experian: Are consumers more educated than ever, when it comes to credit, and credit scores? Or, is it still constantly evolving, as younger people get into that credit sphere?

Quinn: There's probably more awareness of credit scores in the marketplace today and that's probably true across all generations, Millennials, Next Gen-ers, et cetera. But that doesn't necessarily equate to better credit [awareness].

We know, at FICO, that a lot of consumers misunderstand. They're getting access to a score through one of the free sites for example, and then they go to go for a loan. The loan officer says, "Well, that's not the score I'm seeing when I pull your FICO score." It could be because the score they got was an educational score from one of these free sites.

There's a great opportunity within the industry to increase awareness of what score you're getting. Is it a score that's being used by the lender, like a FICO score is? Having that knowledge will make you better prepared for a loan situation that you're trying to secure, either a new car, a new loan, or new credit card.

Experian: We talk a lot about misinformation. Are there one or two things that you hear all the time, that people say, that you're, "Oh, no, that's not right"?

Quinn: Yeah, one of the misnomers or fallacies out there, in addition to income being considered by the score, is that there's this magic cutoff where 30% credit revolving utilization is like the utopian cutoff that you get maximum points for that.

We have a pie chart that shows the allocation of the parts of the FICO score that are driven by those categories, and for amounts owned, it's 30%. But, in the actual algorithm, 30% is not the actual, optimal point to get most points. It works where lower utilization equates to better points, versus higher utilization. That's a misunderstanding we hear a lot.

Another one is related to credit inquiries, and the model does look at credit inquiries because it is an indication that someone is seeking credit. The data continues to show that people who seek credit are more inherently risky than people who don't, but they don't drive the score.

We have a lot of examples, where consumers are very concerned because they have an inquiry on their credit report. It's always wise to look at that in terms of its relative impact on the score, which is relatively minor, for the most part. Those are two examples, plus the income example, where there's some false information out there that could definitely be clarified to help people better understand how scoring works.

Experian: Is there any current economic trends that stand out to you? You mentioned the recession being further behind us. How much of that impacts consumers' behavior?

Quinn: Over the last 20 years when we periodically redevelop the model we get access to newer data. Basically, what we've seen is that the core components of what predicts credit risk have remained the same—pay your bills on time, keep your debt levels reasonable, only apply for credit when needed. If you follow that strategy, whether it's 20 years ago, versus today, that generally equates to a very secure and good FICO score.

But we have seen nuances, tweaks and adjustments along the continuum there. For example, if you look at how people applied for credit 20 years ago, versus how they apply today, a lot more people - both future high risk, and future low risk consumers—are applying for credit. That has an impact on that predictive characteristic and those are examples of how trends have evolved.

In terms of natural disasters, the way the system's set up is that consumers should contact their lenders immediately if they're impacted by a natural disaster, and that lender has rules and options available to them on how they can work with that customer, and report that information to the credit reporting agency. I think that makes the most sense, because the lender's gonna be in the best position to understand, "Matt is impacted this way, this is how I need to treat him, Ellen is impacted this way, I need to treat this differently, and Tom's impacted this way," versus, expecting a score change to be implemented to address all of those unique circumstances.

Experian: Scores are more widely available to Americans these days. Have you noticed a shift towards consumers checking their score more often or at certain times?

Quinn: That takes a really [unique] kind of individual [to check often]. You have some consumers that are Type A, that have very high FICO scores. They monitor religiously and wanna make sure that it stays high and get concerned if it drops one point or not. Then you have—disclaimer—my wife has an 850, and I don't, and I hear about it all the time. Just to be on the record, there's no rule in the model that gives spouses of FICO employees an extra point.

You have some consumers that are interested in monitoring it very closely. Then, you have other consumers that are thinking about getting a car loan in the next couple months, or a home loan, and getting ready for that. They take a more point-in-time evaluation of the score and then secure the loan and say, "Alright, I'm done with that."

Experian: Do you see any behavior changes with people and their credit scores, or reports, related to a concern around identity theft?

Quinn: Definitely. I can just speak from FICO's perspective, but we have our own portal for consumers to get access to their scores, called, myFICO. When a data breach happens we definitely see a big spike in our call volume, in our website hits, and in the ordering of our products and services on the site.

Consumers get more aware, they get concerned, and then they seek out opportunities at Experian, and myFICO, et cetera, to be able to check in and make sure everything's working correctly, and that's a good thing. I mean, the breaches are obviously not a good thing, but if there's one potential silver lining in the breach, is that it raises awareness for everybody, about the need to protect and monitor your personal identity. It's such a critical asset, and if a data breach makes more people undertake those activities, in the long run that's better for consumers and the industry even though I know the short term impact of the data breaches is not a good thing.

Experian: If there's anything you could go back and tell your younger self advice, knowing what you know now, what would it be?

Quinn: Trying to establish credit earlier. I remember when I was in college many years ago I had student loans, but I didn't have any other credit. When I graduated and I got my job, I needed to get a car, and I had to have my parents co-sign that car loan with me. Which was very fortunate that my parents were in that position where they could help.

With my own son right now, when he gets older, I would try to get him signed up on some type of credit. Either as an authorized user on my account where I can manage and monitor that, as a means to help him get some credit established. When he is able to take on that credit responsibility legally himself, he has at least a little bit of information about him on the Experian credit report. That way, I help him get access to that credit on his own so I'm not footing his credit bills when he's 25.

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Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.

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