Credit Scoring BasicsFICO World PreviewFICO World Preview
Julie WoodingJulie WoodingPrincipal Consultant, ScoresFICO
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Agenda» Credit Scoring Basics
» FICO® Score Content
» Preview of Full FICO World Session
3 © 2010 Fair Isaac Corporation. © 2010 Fair Isaac Corporation. 3
Credit Risk Scoring
A statistical process whereby information about aA statistical process whereby information about a credit applicant or an existing accountholder is converted into a numerical score.converted into a numerical score.
This score is then regarded as a measure of thedit i k f th i di id l d (i thcredit risk of the individual concerned (i.e., the
probability of repayment).
4 © 2010 Fair Isaac Corporation.
Types of Scores
Credit Scores
Non-Credit Scores
Risk Scores Non-Risk Scores
Credit Bureau Application Behavior
Scores
Attrition Response RevenueBureau Scores
ppScores Scores Attrition Response Revenue
5 © 2010 Fair Isaac Corporation.
FICO® Credit Bureau Risk Scores
The FICO® credit bureau risk score is a summary of the information on the credit bureau fileinformation on the credit bureau file.
It is a single 3-digit number which rank orders consumers according to riskaccording to risk.
» FICO® Scores 300 – 850®
» Industry Scores 250 – 900Industry Scores 250 900
» NextGen Scores 150 – 950
» FICO® Expansion® 300 – 850®
6 © 2010 Fair Isaac Corporation.
Credit Bureau Risk Score Products – U.S.
Product
Classic FICO® BEACON® FICO® Experian/ FICO®Classic FICO®
ScoreBEACON® FICO®
Risk Score, Classic
Experian/FICO®
Risk Model
FICO®
Expansion®
Score
Classic FICO® Auto Auto Auto __Industry Options Bankcard
MortgageBankcard Bankcard
__
NextGen FICO®
ScorePinnacleSM FICO®
Risk Score, NextGen
Experian/FICO®
AdvancedRisk Score
—
Bankruptcy Model
— FICO®
Bankruptcy Risk Score
Experian/FICO®
Bankruptcy Score
—
7 © 2010 Fair Isaac Corporation.
Score
Scores Are Designed to Rank Order
“Odds quote” based on the general population – notnecessarily applicable to any one lender
Specific lender's applicants will still “rank order”
680
640
660
620
640
9 © 2010 Fair Isaac Corporation.
620
What is a Credit File?
Public Record DataBankcard30-Day UpdateInquiry
Mortgage Data
Auto loan30-Day Update
010101100101001011001010101011011010010110010001010101100101001011001010
010101001000101001 010101010110010100101100101010101101101001011001000101010110010100101100101001010110
101001010011
0 0
Installment30 D U d t
Department Store30-Day Update
101011011010010110010001010101100101001011001010
0101011010101101
10 © 2010 Fair Isaac Corporation.
30-Day Update
Sample Credit Report“The Five Information Zones”
IDENTIFYING (PERSONAL) INFORMATION1 IDENTIFYING (PERSONAL) INFORMATIONI. Wishfor Credit 12 Lost Lane Sam’s Gas & Oil805 Main St. Somewhere, USA 66666 AttendantAnytown, America 77777 Date of Birth 1-25-45
SSN 888 88 8888PUBLIC RECORD (LEGAL ITEMS)
1
2 ( )9-06 Judgment $1000 Satisfied 3-07
COLLECTION ITEMS7-05 Collection $500
2
3TRADE LINE (ACCOUNT) INFORMATIONIndustry Date Date High Balance Current Historical
Reported Opened Credit Rating RatingBankcard 2-10 3-89 $5,000 $0 Current 120+, 6 yrs ago
4$ , $ , y g
Auto loan 2-10 7-07 8,000 1,500 CurrentRetail 12-09 6-03 1,000 200 30 days
INQUIRIESDate Industry Date Industry7 01 09 B k 6 01 09 A t fi
5
11 © 2010 Fair Isaac Corporation.
7-01-09 Bank 6-01-09 Auto finance6-15-09 Oil company 2-07-09 Retail
FICO® Score Predictive Information
CONSIDERED NOT CONSIDERED
Tradelines
CONSIDERED NOT CONSIDERED
Age
Inquiries
Collections
Address
Employment
Public Records
p y
Income
GenderGender
12 © 2010 Fair Isaac Corporation.
Scoring Definitions
CHARACTERISTIC
A question on the applicationA question on the applicationFor example:»# of inquiries in the last 6 months»# of inquiries in the last 6 months»Average balance on revolving accounts
ATTRIBUTE
Answer given by the applicant»Example for # of inquiries: 4
13 © 2010 Fair Isaac Corporation.
»Example for average balance: $600
Sample FICO® Scoring ModelExample: Partial Model
Category Characteristic Attributes Points
Payment History Number of months since the mostt d t bli d
No public record0 – 56 – 11
751015Payment History recent derogatory public record 12 – 23
24+2555
A b l
No revolving trades0
1 – 99
305565
Outstanding Debt Average balance on revolving trades
1 99100 – 499500 – 749750 – 999
1000 or more
6550402515
Below 12 12
Credit History Length Number of months in fileBelow 1212 – 2324 – 47
48 or more
12356075
N b f i i i01
7060
Pursuit of New Credit Number of inquiries in last 6 mos.
123
4+
60452520
N b f b k d01
1525
14 © 2010 Fair Isaac Corporation.
Credit Mix Number of bankcard trade lines
123
4+
25506050
FICO® Multiple Scorecard Segmentation
Credit Bureau File
Previous serious delinquencyor derogatory public record?
YesNog y p
2 “d ”8 “ d ” 2 “derog” scorecards based upon:
8 “non-derog” scorecards based upon:
87
65
4
21p
» Public record
» Worst rating
p» Thickness of file
» Age of file
» Recency of new openings
32
1
15 © 2010 Fair Isaac Corporation.
1. Payment History
Key Factors:
» How recent is the most recent 1. Payment Hi tdelinquency, collection or
public record item?
» How severe was the worst
History35%
5 Credit Mix 10%» How severe was the worst delinquency – 30 days, 90 days?
» How many credit obligations 4. Pursuit of New
Credit3. C di Hi
2. O t t di D bt
5. Credit Mix 10%
y ghave been delinquent? 10%Credit History
Length15%
Outstanding Debt30%
17 © 2010 Fair Isaac Corporation.
Payment HistoryExample
Hi hHigh
Ris
k
Low
Months Since Most Recent Major Delinquency
Low0–11 24–35 36–47 48–High No Delq12–23
18 © 2010 Fair Isaac Corporation.
Months Since Most Recent Major Delinquency
2. Outstanding Debt
Key Factors:
» How much does the consumer owe creditors?
» What percentage of available credit card limits is the
1. Payment History35%
5. Credit Mix 10%credit card limits is the consumer using?
» What percentage is 4. Pursuit of New
Credit10%
3. Credit History
2. Outstanding Debt30%p g
outstanding on open installment loans?
yLength15%
19 © 2010 Fair Isaac Corporation.
Outstanding DebtExample
High
Ris
kR
R ti f T t l B l t
0–19% 40–59% 60–79% 80–99% 100+%20–39%Low
20 © 2010 Fair Isaac Corporation.
Ratio of Total Balances to Total Limits on Revolving Trade Lines
3. Credit History LengthKey Factors:
» How long have accounts been established average numberestablished – average number of months accounts have been open
1. Payment History35%
5 Credit Mix 10%» New accounts – Number of
months since most recent account opening 4. Pursuit of New
Credit
2. Outstanding Debt
30%
5. Credit Mix 10%
10%3. Credit
History Length15%
21 © 2010 Fair Isaac Corporation.
Amount of Credit HistoryExample
High
Ris
k
0-23 24-47 48-71 72-119 120+
Number of Months Since Oldest
Low
22 © 2010 Fair Isaac Corporation.
Number of Months Since Oldest Revolving Trade Line Opening
4. Pursuit of New Credit
Key Factors:
» Inquiries: Number of recent qinquiries (12 months)
» New accounts - Number of trade lines opened in last
1. Payment History35%
5. Credit Mix 10%
trade lines opened in last year
4. Pursuit of New Credit
10%
3. Credit History
2. Outstanding Debt
30%
10%Length15%
23 © 2010 Fair Isaac Corporation.
Pursuit of New CreditExample
Young/Thin files Mature/Thick filesYoung/Thin files Mature/Thick filesHigh
Ris
k
2 3 4-High0 1Low
24 © 2010 Fair Isaac Corporation.
Number of Inquiries
Types of Inquiries
» FICO® scores only consider consumer-initiated inquiries posted in the last 12 months
» FICO® scores do not consider the following inquiries:» Promotional inquiries» Account review inquiriesq» Consumer disclosure inquiries» Insurance inquiries» Employment inquiries» Employment inquiries
25 © 2010 Fair Isaac Corporation.
Inquiry de-dupe logic
12 Months Scoring Date* * ** * * * * * *
12 Months Scoring Date
45 day de45 day de--dupedupe 30 day buffer30 day buffer
» The credit bureau risk score models observe inquiries over a 12-month period. p
» Auto- and mortgage-related inquiries that occur 30 days prior to scoring have no effect on the score. Outside this 30-day period, auto and mortgage related inquiries that occur within any 45 day
26 © 2010 Fair Isaac Corporation.
auto- and mortgage-related inquiries that occur within any 45-day period are treated as a single inquiry.
5. Credit MixKey Factors:
» What is the mix of credit product types?product types?
» Revolving credit – number of bankcard trade lines
1. Payment History35%
5. Credit Mix 10%
» Installment credit – percent of trade lines that are installment loans
4. Pursuit of New Credit10%
3. C dit Hi t
2. Outstanding Debt
30%
10%
installment loans 10%Credit History Length15%
27 © 2010 Fair Isaac Corporation.
f CO SPreview of Full FICO World SessionPresented by multiple FICO experts
» FICO Score Basics» Use of Scores Across the Account Lifecycle» Tracking and Monitoring» Risk Management – Customer Management» Risk Management – Originationsg g
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The Credit Customer Life Cycle
Targeting Origination/Underwriting
ManagingCustomersExternal
» Mail/don’t mail/how frequently?
» Accept/reject?
» Tier pricing? » Adjust credit line?
» Authorize?
Underwriting CustomersExternalData
A
» Target prospect/ customer?
» Tailor offer/message/ i ti ?
e p c g
» Initial line?
» Upsell/downsell/offer alternative?
» Authorize?
» Reissue?
» Reprice/Punitive Pricing?
D A
T A
T A
incentive?
» Tier pricing?
» Timing?
Pricing?
» Service level?
» Collections?
D A
T
» Recoveries?InternalData
29 © 2010 Fair Isaac Corporation.
Prospects CustomersActionsReactions
Targeted Mail StrategiesTwo-dimensional Strategy Provides PowerfulSolicitation Refinement
9876543210
FICO Revenue ScoreFICO
Risk Score
…
<650
No mail
680-689
Minimum Limit
Medium APR
Minimum Limit670-679
…
Standard LimitStandard Limit770-779
…
Low APR
800-809
Premium Limit
Very low APR/No fee790-799
780-789
No mail
30 © 2010 Fair Isaac Corporation.
810+
800 809 Very low APR/No feeNo mail
f CO SPreview of Full FICO World SessionPresented by multiple FICO experts
» FICO Score Basics» Use of Scores Across the Account Lifecycle» Tracking and Monitoring» Risk Management – Customer Management» Risk Management – Originationsg g
31 © 2010 Fair Isaac Corporation. © 2010 Fair Isaac Corporation. 31
Acceptance Rates Declining
100%
75%
50%%
25%25%
0%
32 © 2010 Fair Isaac Corporation.
J0%
F M A M J J A S O N D J F M A M J J
Delinquency Rates Rising
4.0%
3.0%
2.0%
1 0%1.0%
0%
33 © 2010 Fair Isaac Corporation.
J0%
F M A M J J A S O N D J F M A M J J
Summary
» FICO Score Basics
» In April please join us for this practical set of sessions included in p p j pyour registration price!
» The Full FICO World session include these additional sections» Use of Scores Across the Account Lifecycle» Use of Scores Across the Account Lifecycle» Tracking and Monitoring» Risk Management – Customer Fundamentals» Risk Management - Originations
» Learn with the experts, ask questions about your portfolio and take away sensible tips that you can use to be successful in your y p y yjob.
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This webinar is a preview of a presentation at:presentation at:FICO World 2010April 13-16 Intercontinental MiamiApril 13 16 Intercontinental Miami
www.fico.com/ficoworld
K t P t Mi h l P tKeynote Presenter Michael PorterAuthor, On Competition, Competitive Strategy
90+ Presentations, Case Studies and WorkshopsF C lt ti ith FICO E t
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This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent.© 2010 Fair Isaac Corporation.
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This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent.© 2010 Fair Isaac Corporation.