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FICO, Equifax Offer Predictive Modeling for Credit Score Effectiveness

Models show what existing scores will mean as the economy changes. A 700 could act like a 707 in good times or a 695 in bad ones.

Among the many areas of banking affected by the recession is the world of credit scoring. "As the economy has changed in the last year and a half, lenders are seeing different performance dynamics with credit scores," notes Tom Quinn, vice president of scoring at FICO, who spoke to Bank Systems & Technology in an interview yesterday. "It's no surprise that low scores have increased given the economic conditions." According to Quinn, banks have been asking FICO for predictive analytics that will suggest how the performance of consumer credit scores will change in the future, to help them make lending decisions.

FICO and Equifax today introduced the FICO Economic Impact Index, which models economic factors that could affect FICO scores. It doesn't predict what the scores themselves will be, but what existing scores will really mean. For instance, if the economy is on the upswing, a 700 score might perform like a 707, Quinn says.

The product gives bankers a range of six scenarios to choose among, ranging from doomsday to rosy, provided by Moody's. Then the software will predict how the bank's loan portfolios' credit scoring will be affected by that set of conditions. The bank might use the forecast information to determine score cutoffs for account opening and portfolio management decisions.

In its forecasting models, FICO considers factors such as unemployment rates, GDP, interest rates, pricing fluctuations, and foreclosure rates.

Equifax is delivering the product to customers.

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