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But FICO, which had $605 million in revenue last year, is not directly regulated by any government agency and its credit rating formulas are secret. Despite a name that vaguely sounds like it must be federal something-or-other, FICO actually stands for Fair Isaac Corp., a Minneapolis company that creates proprietary mathematical algorithms used to calculate consumer credit scores.

and Experian Plcthe three major credit bureausvacuum up information on customers payment histories with banks, retailers, credit cards, utility companies, landlords, mortgage loans, student loans, phone bills, and even parking tickets.Think of it this way: If credit scores were chili, FICO would write various recipes then sell them to the credit bureaus, which gather the raw ingredients themselves. TransUnion Corp., Equifax Inc.

We support the CFPBs study of credit scores and believe it will inevitably conclude that consumers are best served by focusing less on the different types of consumer credit scores available, and more on the underlying document that is used to generate a scorethe credit reportand how it can be an empowering tool for consumers, Experian said in a statement.

FICO is trying to build the best predictive model they can, said Tom Quinn, FICOs former vice president of scoring who now works for the consumer education website Credit.com. They let the data tell them whats fair.. If the data predicts a different pattern, between people with different kinds of debt, then that would be picked up eventually.

According to Hoovers Inc., a clearinghouse for company profiles and industry information, the newest FICO formula reduces penalties for multiple accounts and is more lenient on occasional late payments, which don’t necessarily indicate a poor credit risk. Additionally, authorized credit card users (such as teenagers on a parent’s account) no longer benefit from activities of the account owners, which prevents artificial score inflation..

Another concern of consumer groups: Credit bureaus have little, if any, financial incentive to treat consumers fairly. That means the customer for the credit bureaus is the creditor, not the consumer, critics say. Before extending credit to a consumer, an auto dealer or a landlord buys the customers credit score from one of the three big credit bureaus to assess the risk of default.

If a company like FICO were to reveal the coding for the model, then [consumers] could potentially use that to manipulate their score for short-term benefit The creditor will lose confidence in the tool and ultimately raise the cost of credit for everyone.. There are years and years and years of intellectual property that have been built into these scores and [companies] should have a right to have that protected, Quinn said.

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