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Uncovering hidden credit scores |
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Now let's say that Leslie has a huge balance and she's also got huge balances on other credit cards. She's starting to miss
payments on other credit cards, and during the month-over-month process of account management, I notice that your FICO score has gone down and
I'm little concerned about that. So I'm either going to close your account, reduce your credit limit, increase your interest rate or a do a
variety of the other nasty things like lower your grace period, start aggressively calling you if you're over a day or two late. It's just the
same general-use FICO score, the bank card score, but it's just another use of it.
Now Leslie has gone into collections because she just isn't paying her bill, and we've sent it off to a collection agency because
we're tired of sending her notices in the mail. She's ignoring them. Now the collection agency is using a collection score to determine the
likelihood of Leslie paying any of that money back. If her collection score is very, very bad, then they may not spend the money and time and
resources to try and collect it. They may just send collection letters to you and just put it on your credit report and then eventually sue you.
Or if your collection score is very, very good, they know that they have a good shot at recovering something, so they may put one of their junior
collectors on it or call you instead of just sending you letters, so they're going to vary their actions to collect based on what their collection
score is.
 What information are they using to come up with a
collection score?
 Credit data. Let me give you an example. Let's
say that Leslie has a $5,000 collection. One of the legal reasons or the legal permissible purposes to pull someone's credit report is the act
of collecting a debt. The collection agency can pull your credit report. That's completely legal. If they notice that Leslie has a credit card
with a $20,000 limit and a zero balance, she has the ability to pay that $5,000 collection because she can just charge it on the other credit
card. The collector doesn't care that that's a bad financial move, and it's foolish for you to do that because you're really just robbing Peter
to pay Paul. That will be counted in your collection score. You have the ability or capacity to pay the collection, so they'll know this and
they'll use it in their strategy when they're trying to entice you to pay. "Hey, why don't you just charge it?" or "Why don't you just give us
the card number and we'll charge a thousand dollars a month for the next five months?" Those are the types of deals they'll try to offer you.
That'd give you a good collection score.
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| A look at risk scores |
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Customized scoring models
And to all that, add the custom model. It's basically an analytic contract given to either someone like Fair Isaac, or one of the bureaus, or
one of the other boutique modeling companies out there. You'll have a big lender -- say, AmEx, for example -- who will say, "Hey, look, we want
to build a custom credit risk score for applications or for account management. We like FICO, but we want something specifically built for
American Express." They'll contract with one of these companies to come in and actually develop a credit scoring model just for them. It's very,
very expensive to do that, but the performance of the model, we're talking about Ferrari versus Buick. It's significantly more powerful because
it is in fact a model built on American Express data for use only by American Express.
The bigger the bank, the more likely they have a variety of custom models built within their app-processing systems and account
management systems. Almost every single one of them uses FICO as an input.
Let's say that Leslie McFadden's $500,000 salary equals 50 points and the fact that she's lived at the same address for 10 years
equals 50 points. The fact that she's been in the same industry for 15 years means that it's worth 50 points. The fact that her FICO score is
worth 796 is also worth 50 points. You can give points for certain things. It's used as a variable within the model.
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