Bill, Earl & the Ultimate Snake Oil

How FICO Scores Came to be

Bill Fair, a lot like Choo Choo Charlie, was an Engineer. An electrical engineer according to his claims. Earl Isaac was not an Engineer, not a financial wizard, had never worked in finance HOWEVER he was a mathematician. In the late 1950s, Bill and Earl had a dream, a dream that one day, computers would be a very big deal. So big they decided to SELL computer systems and software any place they could. They did some interesting things. One of their first solutions involved calculating the risk of an offshore oil drilling platform capsizing while being towed from San Francisco to Santa Barbara. They also did some early computer training in the Bay Area, but their first big contract, the one that gave birth to their digital version of a OUIJA board, was developing an accounting system for Conrad Hilton’s brand spanking new credit card - Carte Blanche. While they weren’t out selling things they noticed something about the credit cards they were “servicing.” Folks that routinely maxed out their cards without paying down the entire balance monthly were the most likely to “default.” Keep in mind that unlike more contemporary cards which accrue interest on unpaid balances the Carte Blanche card required those to whom the cards were issued to pay the balance in full each month. Most Americans who have credit cards aren’t in a financial position to pay thousands (or even hundreds) of dollars each month solely for the purpose of carrying a white credit card. The same fact was true in the late 1950s when Conrad (“Con” to his friends) decided to roll out his card. Since cardholders were obligated to pay the balance in full each month it’s understandable that any hiccup in one’s monthly income could be a problem.

Enter the snake oil moment of Bill & Earl. Bill & Earl concluded that, based on the very, very (VERY) limited data they had from the Carte Blanche accounting system, cardholders who maxed out their cards without paying them down were much more likely to reach a point where they stopped paying completely. Out of this Bill & Earl invented the “Credit Score.” In the beginning, shortly after Bill & Earl had started Fair Isaac and Company, they developed scores on actual scorecards. By the 1980s Bill & Earl’s prophetic computer system was all digital. In the early 1980s sales representatives from Fair Isaac and Company (“FICO”) were showing up at bank credit centers on a regular basis looking for ways to convince bankers (AHEM) to use their magical “predictive analysis” product the “FICO Score” instead of their eyes and brains. I will always remember one of my first interactions with the FICO sales force. The salesman asked me for a copy of a credit report we had just pulled (keep in mind this was a physical report produced by, in our case, a TRW machine, TRW was the predecessor of Experian). The salesman had wanted to see our credit report because, thanks to the work of Bill & Earl, TRW had agreed to print FICO’s magic number on the printed credit reports. The pitch was simple - instead of actually looking at a potential borrower’s credit history, we could disregard ALL of it and look at the magic score. In those days the range of scores was a bit smaller than it is today however, using the magic score in conjunction with the “magic key of credit knowledge” my employer could make a credit decision in moments rather than minutes. Thus, instead of grabbing a phone to ask a potential borrower why they had missed some payments a couple of years ago (“we lost the mule and granny was tipsy all the time and needed watching”) a credit officer needed only consult the magic score (and all important interpretation of the same) to make the decision. Being the doubting Walter that I am I asked the schm….er, salesman about their warranty regarding their magic scores and, amazingly, there wasn’t one. It turned out that the magic scores, like the grains of sand in an hourglass, were only good for a moment as they were but a “snapshot” of one’s credit. To this day I remember the joy I felt escorting this idiot out the door. It turns out that idiot and his employer had realized the dumbing down of America was already in overdrive.

Today, the odds are very high that you know your FICO score. The odds are even higher that you realize it’s often based on inaccurate information and are curious about what sort of secret sauce Bill & Earl’s corporate descendants use to come up with their numbers. Surprise, surprise - FICO won’t tell you because it’s a secret. Do they use race or ethnicity? Do they use marital status, education level or zip codes? In fact, FICO was a HUGE part of the mortgage meltdown of 2007-2008. That’s because in 1995, magically, the two Government Sponsored mortgage Entities recommended the use of FICO scores in deciding whether to approve a mortgage application. By 1999 most mortgage lenders had embraced the notion of “FICO based lending” and the die was cast. Interestingly, FICO’s revenues in 1995 EXPLODED, imagine that. Immediately prior to the meltdown IndyMac was approving mortgage loans (usually for 30 years) if an applicant had a FICO score of 700 and at least ONE verified asset (such as that $100.00 savings account lots of kids had at the time). What they didn’t need was - INCOME!!!

No doubt the good folk at FICO today would be quick to remind you that “a credit score is only a snapshot” but, as someone who spent 27 years in the financial services industry I’ll tell you what it really is - GARBAGE. Among my first clients in the mortgage meltdown era were a young, professional, black couple. I will always remember asking them about the reason they had such horrible loan terms presuming I’d hear about their credit problems except - they hadn’t had those. While their original lender, Countrywide, was known for putting folks with good credit into loans priced for those with horrible credit there was certainly more to the story than I was seeing. I’ll just finish with this - when I contacted Countrywide and pointed out the ONLY reason I could determine that my clients had received such a horrible loan was the fact they, like me, had a permatan; Countrywide offered the first and only REAL loan modification of note I have ever seen them (OR their successor) offer, even in the course of protracted litigation. Just remember, OUIJA boards can be fun but you should probably NEVER use them to make life impacting decisions.