An interesting piece in the Star Tribune: Fair Isaac hopes its new tools lessen lenders’ risk of defaults was sent to me by former student Erik Anderson. Fair Issac is apparently updating their method for computing FICO scores for 2008. According to the article “in the next few weeks [Fair Issac] will roll out a suite of tools designed to predict future default risk”. The emphasis is on predicting. In other words, given a database of past credit reports, a model is developed for predicting default risk.
I would be surprised if this is a new methodology. Trying to decipher what really is new is very hard. Erik pointed out the following paragraph (note the huge reported improvement):
“The new tools include revamping the old credit-scoring formula so that it penalizes consumers with a high debt load more than the earlier version. The update, dubbed FICO 08, should increase predictive strength by 5 to 15 percent, according to Fair Isaac’s vice president of scoring, Tom Quinn.”
So what is new for the 2008 predictor? The inclusion of a new debt load variable? a different binning of debt into categories? a different way for incorporating debt into the model? a new model altogether? Or maybe, simply the model based on the most recent data now includes a parameter estimate that is much higher for debt load than models based on earlier data.