Welcome to the “Dog Days,” so named because the “Dog Star” is high in the nighttime sky and very visible. My grandmother used to tell me that “Dog Days” were so named because dogs went blind with the heat of the late summer, but, upon further inquiry, I regret to report that my dear grandmother was misinformed.
On the subject of “misinformed,” you need to know that credit scoring is actually performed by the bureaus, using “algorithms” supplied by Fair Isaac. For those of us who did not major in mathematics, traditionally an “algorithm” referred to a set process or function through which you could put a number to obtain a result. A very simple algorithm might be “3x,” and then you would supply the specific number. So, if you supplied the number “4″, then the algorithm would give a product of 12.
Obviously, when calculating something by a highly complex computer system, the algorithms become more and more complex.
The essential point that you need to understand, however, is that the “algorithms” are the functions or processes through which your personal credit information is put to create a credit score. However, it is not nearly as scientific as most people believe. Below is a short article reprinted from the New York Times which identify, correctly, the credit bureaus as the ones who create the score, using algorithms licensed from Fair Isaac Co. This really is a classic example of “garbage in, garbage out,” because if the bureaus do not include positive accounts (which happens all the time) or if they include false or inaccurate negative accounts, your credit score takes a big hit.
Enjoy the article and enjoy the “Dog Days”. Here it is.
It is not FICO that comes up with a borrower’s score — it just sells the algorithms. The companies that do are the big three credit bureaus, TransUnion, Equifax and Experian. They gather input about the prospective borrower’s lending history from various lenders like credit card companies and auto dealers, plug them into a formula and derive a credit score.
You would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. There aren’t. Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.
And finally, they don’t take into account the many, many mistakes that are found in credit reports. My own credit reports, which I looked up for this column, are a case in point. Although my score was O.K. — the low 700s — the reports themselves were full of unpleasant surprises. They listed credit card accounts I didn’t have, and failed to list at least one big one that I did have. Two of them noted that five years ago, I was late on a car payment. (I was?) My daughter’s old Brooklyn address was listed as my former address. According to Experian, I was still writing for Fortune magazine. It said I no longer lived in a house that I just bought two months ago. TransUnion, meanwhile, listed The New York Times as my former employer. Currently, TransUnion said, I am an employee of Rite Aid.
Rite Aid? I know, I know — it is supposed to be up to me to catch their mistakes (which is also why they don’t have to care about the mistakes.) But what I find incredible is that we have imbued credit scores with these magical predictive powers — and yet the companies coming up with the scores can’t even get the borrower’s address and employer right. It would be funny if it didn’t matter so much.