Section #3: Shoddy Math

Shoddy math. Making things even worse is just how FICO® scores are constructed. Here's practically everything Fair Isaac reveals about the scores, a bit of happy pap you've no doubt seen repeated on dozens of web sites: 35% of your score is influenced by account history (how timely you've paid), 30% to current account usage (how much of your credit is being used, with greater amounts being negative), 15% to length of credit history (the longer the better), 10% to new credit inquiries and accounts (with fewer being better), and 10% to the "credit mix" or variety of credit types present. Scores range from 350 to 850, with the mean value score being right at 725. In real life, favorable credit rates are typically extended to those with scores of 720 or above.

Now here's what they don't tell you:

Your credit score isn't just about you. If it was, providing it along with the rest of your credit report might not violate federal law, which stipulates that your consumer file must only (and obviously) be about you. Rather, it's about you and others. More specifically, Fair Isaac makes use of what they call "Score Cards," which groups consumers according to whatever criteria they choose. Then, they run what we statisticians call Pearson correlations between credit report items and subsequent late-pays for each consumer grouping. Through that continuous process, Fair Isaac stays on top of the variables du jour which may diagnose bad future news. The final step happens when your credit report is pulled and is analyzed through the use of those comparative algorithms, and a credit score is then reported which purports to predict the possibility that you are the type of person who may one day become seriously delinquent. Wowzah!

So does this sound kosher? Are prediction and speculation and comparisons with other consumers fair items to include in a credit report alongside the stuff that otherwise really is about a single consumer? Undoubtedly, the judiciary will eventually decide. Suffice to say, if I had a diagnostic FICO®-like score for corporate performance, I'd have to give Fair Isaac a 640, because I predict that the courts will one day kick their collective butts and force serious changes in the way consumers are manhandled.

Next > Section #4: Secret Decoder Ring Needed

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