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Pitfalls of FICO score exclude the credit invisible

Pitfalls of FICO score exclude the credit invisible 

Senate and NCUA propose changes to how credit scores are calculated 


Housing is at post-recession record high affordability.  This means the Housing Affordability Index, developed by the National Association of Realtors, and the go-to reference for housing affordability, reports the median-income family has more than enough income to qualify for a mortgage to buy the median-price home.  

Yet, consumers are wary of purchasing.  Why?  Vice President Chief Economist, Sean Beckett at Freddie Mac, one of the nation’s largest government-sponsored enterprises that helps mortgage capital fluid and available to more home buyers, shares 3 key reasons homeownership still feels our of reach to many buyers; houses are expensive, houses are hard to find, borrowers are uncertain if they can qualify for a mortgage.  

Let’s explore the root of last aforementioned deterrent to home ownership - credit scores - confusing consumers and plummeting their confidence in purchasing mortgages.  

There are a plethora of credit scoring models, with different ranges and applicable loan eligibilities.  FICO score (previously Fair Isaac Corporation and aptly named after its creators Bill Fair, an engineer, and Earl Isaac, a mathematician) is used to determine creditworthiness by the majority of mortgage lenders.  FICO scores are calculated using algorithms that mine credit report data from the three major reporting bureaus TransUnion, Equifax and Experian.  These organizations compile information about a consumer’s payment history, number of accounts, accounts in default and other criteria in order to predict the likelihood of said consumer repaying his/her loan balance.  

Seems legit, right?  For many, credit scores are a report card to prove they use credit responsibly and are a low-risk mortgagee.  For others, like the millions of credit invisibles - those without enough credit history to ping the radar of credit rating agencies - the struggle of home buying is real.  







The problem lies in a so-called “FICO monopoly” with the nation’s largest secondary market mortgage players, Freddie Mac and Fannie Mae.  “Currently, the GSEs [Freddie Mac and Fannie Mae] are mandated to consider a decades-old credit scoring model that does not take into account consumer data on rent, utility, and cell phone bill payments,” Republican Senator, Tim Scott’s office reported. “This exclusion disproportionately hurts African-Americans, Latinos, and young people who are otherwise creditworthy.”  Senator Scott along with other Republican and Democratic seats fully support the recently re-introduced the Credit Score Competition Act. 

“Alternative credit score consideration by the GSEs is a win-win: it opens up the market in a responsible manner for those qualified to buy a home and eliminates the government-backed monopoly in credit scoring. That's why the Credit Score Competition Act has garnered such strong bipartisan support," said California’s Republican Representative, Ed Royce.

Currently, Fannie Mae and Freddie Mac solely rely on a single credit scoring model, one that doesn’t consider rent or utility payments, to make mortgage purchasing decisions.  Combine this ‘credit-invisible’ excluding score model with the GSEs’ command of the secondary mortgage market and you have a government-backed credit scoring monopoly, this bi-partisan press release stated.

Major mortgage and credit players are not wholly opposed to change.  Donald Layton, CEO at Freddi Mac told HousingWire in a 2014 interview that the GSE is “studying one or two alternatives to FICO.”  The National Credit Union Administration recently released a package of regulatory reforms honoring President Trump’s order to massively roll back regulation.

Change is on the horizon but will demand comprehensive reform to replace the current status quo.  FICO is introducing the FICO XD score that will examine how consumers pay their rent and utility bills.  Federal Housing Finance Agency Director, Mel Watt, agrees, “We have an obligation to get this right and we need more information to be able to do so.” 



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