Maybe you were forced to put down a big deposit when you got phone service. You might have ended up paying extra-high rates for auto insurance despite a flawless driving record. Or, maybe you suddenly had trouble finding homeowner's insurance.
In all three cases, the reason could well have been the same: Your credit score wasn't high enough. These days, that score, calculated from your personal financial data using a secret formula, has more influence over your life than ever.
Increasingly, lenders, merchants and even many insurers consider a customer's credit score a critical tool for predicting whether they'll make money on that customer. The scores are based on complex and closely guarded mathematical formulas, many of them written here by Fair, Isaac & Co.
That gives the little-known California company an influential role in the lives of millions of American consumers. Its scores already play an important part in many insurance decisions, a trend that is drawing increasing scrutiny from regulators. Now, Thomas Grudnowski, Fair Isaac's chief executive since 1999, is leading the company into another potentially controversial business: teaching people how to boost their credit scores and to use them to better advantage.
Starting this spring, Fair Isaac plans to launch the first of a new set of services that would do just that, for a fee. One of the new services, which will draw on the company's insider knowledge of its own credit score formulas, will show consumers how certain key financial variables influence their credit scores. For an additional fee, another service would alert consumers to changes in their scores that might indicate somebody was stealing their financial identity. Yet another fee-based service would show people who want to refinance their mortgages how to get a better interest rate by timing their refinancing to coincide with an increase in their credit score.
Grudnowski is counting on the new services to help spur Fair Isaac's sales growth, which has slowed in recent years as consolidation in the financial industry has reduced the company's traditional customer base. He says he thinks that selling data to consumers could be a $500-million to $1-billion market for the company within five years; Fair Isaac had 2001 sales of $329.1-million.
Some consumer advocates, already critical of the secrecy surrounding Fair Isaac's credit-scoring formulas, are troubled by its planned expansion. Among them is Ed Mierzwsinki of the United States Public Interest Research Group, who says the company's new services are just another way of charging consumers for something that should rightfully be theirs for free: access to their credit scores. Fair Isaac is being "incredibly greedy," says Mierzwsinki, whose liberal consumer-advocacy group is based in Washington.
Fair Isaac says that's not the case. "Judging by our consumer response so far, people from all walks of life very much want these new services," company spokesman Craig Watts says.
The new services put Fair Isaac in the unusual position of charging consumers for tips on how to better the very scores that Fair Isaac writes the rules for. But the company says it doesn't see any conflict in that position. It says its models merely use technology to measure the same kinds of risk factors that a lender would weigh in deciding whether to make a loan.
Fair Isaac isn't the only company that develops credit-scoring formulas, but it is by far the market leader. It says credit scores based on its flagship "FICO" formula are a factor in about three-quarters of mortgages approved in the United States.
For years, the company refused to let consumers see their credit scores. Two years ago, when Internet lender E-Loan Inc. began giving consumers free online access to their FICO scores, Fair Isaac urged the credit-reporting companies that provided the scores E-Loan used to stop doing so. The lender quickly backed down. Fair Isaac says it didn't think consumers should be given their scores without information that would help them understand the numbers. Federal laws require the nation's credit-reporting companies, the sources of much of Fair Isaac's data, to give consumers access to their credit reports for a nominal fee or, in some cases, free of charge. But those laws don't apply to credit scores.
Last year, under mounting pressure from legislators and consumer groups, Fair Isaac launched myfico.com, a Web site that gives consumers access to their personal FICO scores. For $12.95, a consumer gets 30 days of online access to his FICO report. So far, the company says, more than 1-million consumers have paid for the service, which it operates as a joint venture with Equifax Inc., the Atlanta credit-reporting company. Myfico.com was introduced about five months after California passed a law requiring lenders to disclose, at a reasonable cost, credit scores used in making decisions on home loans.
On the FICO scale, a score of 300 indicates a consumer is a terrible credit risk, while a score of 850 denotes an ideal borrower. The median score is about 720. In addition to their scores, consumers who buy the basic myfico.com service get a copy of their Equifax credit report and a general explanation of the factors that might be holding down their credit scores. Critics say these explanations are too vague to be of much help to consumers.
Partly in response, Fair Isaac, in the next six to eight weeks, plans to upgrade its $12.95 myfico.com service to include an online calculator that will let consumers see how seven key variables could affect their FICO score.
According to a prototype of the new service, a consumer with a 707 score could raise that score by as much as 20 points by paying down $750 on $2,230 in credit card balances. But the prototype's advice isn't always as straightforward. For example, a consumer with a 707 score could raise or lower that score by 10 points by obtaining a new charge card with a $3,000 credit limit.
Consumer groups argue that the company should expose the formula to public scrutiny. But the company has refused to do so, citing competitive concern, though it says it cooperated with legislators and regulators.
Fair Isaac says it plans to market its new consumer-oriented services primarily through lenders and financial Web sites. Watts says about a half-dozen lenders and Web sites are providing access to the myfico.com service. These include Quicken.com and Citibank, a unit of Citigroup Inc.
Increasingly, credit scores also are being used to make business decisions that don't involve lending money. Fair Isaac pioneered their use by insurance companies. Now some auto insurers think the scores are a better predictor of a client's propensity to file insurance claims than is the client's driving record. The result: If your credit score goes down, your auto-insurance rate may go up or you insurer might choose to drop you.
The insurance industry says various studies have shown that consumers with lower credit scores are more likely to file auto or home-insurance claims, though the industry isn't sure why. That's "the $64-million question," says Frank McConnell, a Safeco Corp. assistant vice president and its director of personal insurance lines.
Fair Isaac says it advises its clients against using credit scores as their sole criterion for accepting or rejecting a client or credit applicant.
Nonetheless, Grudnowski, the company's CEO, says there's no doubt that credit scores are a good predictor of future insurance claims.
"That's just a fact," he says.