The National Association of Realtors(R) recently called on Fair Isaac Corp., developer of the FICO score model, to revise some of its computations to take into account the negative impact on consumers when banks and credit card companies unilaterally reduce or cancel credit lines, even when consumers are in good standing on those accounts. An NAR spokesman said that FICO's software is "unable to differentiate between innocent victims and people whose behavior genuinely merits reductions," and called the FICO model "archaic."

It has been a while since FICO made any substantive changes in their model. The last time it rolled out a new formula, in Spring 2008, was in reaction to a rising level of delinquencies - a precursor of things yet to come - and the probably to the inauguration of a new scoring model developed by the three credit bureaus who had been watching FICO's success in marketing credit scores to consumers. At the time the changes were announced, FICO predicted that its new scoring system would help lenders reduce the default rates on consumer loans between 5 and 15 percent while actually raising the scores of some consumers.

Utilization was not among the areas involved in those changes. The most sweeping tweak was a response to a perfectly legal but incredibly devious credit repair scheme called "piggy backing." An account holder can name another party as an "authorized user" on a credit card and it was a long time strategy for parents to put a child's name on an account which automatically transferred some of the parent's credit history to the child, giving him a leg up in establishing his own credit. Wives often access their husband's accounts as authorized users as well, rather than becoming co-borrowers or joint owners of the account.

However, FICO found that credit repair agencies were soliciting persons with high credit scores to sponsor total strangers as authorized users; in effect, paying these sponsors to rent out their credit rating. The users gained a credit history but not the ability to actually use the card or any access to the sponsor's personal information. After a few months the piggy backer was removed from the card and the sponsor's credit could be rented out to another credit repair customer. There were stories of sponsors who made as much as $10,000 per month through such programs. Privacy and credit laws made it impossible for a lender to get personal information about the authorized user so FICO changed the scoring model so it no longer recognized authorized user accounts in scoring and eliminated the automatic boost in the credit score of the piggy-backing consumer.

FICO also changed the way it treated delinquencies. An individual who was seriously delinquent - over 90 days - on a single major account while maintaining his other accounts in good standing was likely to see his score increase under the new rules. However, one who demonstrated a pattern of late payments on multiple accounts probably saw his score go down. At the time the change was announced FICO said this change could alter an individual's credit score by 20 to 25 points - in one direction or the other.

FICO scores are calculated by weighting several factors from an individual's credit report. The credit history, which is the main focus of a credit report, accounts for only 35 percent of a FICO score. Given almost equal weight (30 percent) is the utilization of credit. This is the percentage of credit an individual has used relative to the amount that is available. A consumer with $10,000 in open lines of credit but only $2000 in debt will score higher in this category than one who has used $9,000 of the available credit.

The length of time an individual has had credit counts for 15 percent of the total score. A consumer who opened his first department store charge account in 1985 will score higher than one who first got credit in 2009.

The last two categories, each of which count for 10 percent of the score, are the number of times the individual has applied for new credit in the recent past (the 2008 changes also included a tweak to this to allow for consumer "shopping") and the diversity of the types of credit in a portfolio.

FICO has always been cagey about average credit scores - occasionally publishing score ranges. A comparison between the 2005 figures - the last we could find - and the present ranges would be informative. In 2005, MND reported:

"Approximately 1 percent of the population with established credit has credit scores below 500 and another 13 percent score from 500 to 600. By far the largest group, 28 percent, is in the 750 to 799 scoring range. About 11 percent of the population is in that rarified area above 800 points. The median credit score (the point where 50 percent rank higher and 50 percent rank lower) is 723.

But back to the NAR's complaint. The Association wants FICO to either totally disregard the utilization rate for consumers who had a reduction or tabulate the score as if the reduction had not taken place.

While FICO has not publicly responded to NAR, they did conduct a study late last year on the subject of credit line reductions. Their analysis shows that approximately 14 percent of the U.S. consumer credit population experienced a reduction in total revolving credit between April 2009 and October 2009. Four percent had a risk trigger such as a late payment while 10 percent did not. FICO found that among the latter group, the affected consumers already tended to be very low-risk with a median FICO score of 757 and low balances and credit utilization ratios. As a result, small reductions in their total revolving credit lines had a minimal effect on their FICO scores. The average reduction was $4,800; about 12 percent of the average revolving credit available to this population, and the reduction resulted in average change in utilization from 24 percent to 27 percent between April and October 2009.

FICO said it observed very limited impact on scores for the no-risk triggers group. Their median FICO scores in fact increased slightly (from 755 to 757) during the period.

by Jann Swanson