Yesterday I wrote about my credit lines being cut but it’s not important anymore because I’m predicting the demise of FICO.   I’m on record as having a great disdain for credit reporting agencies and I’m glad to see change is coming.  We are clearly in a new banking & lending environment and will be so for the foreseeable future so let’s take a look at a few variables that will contribute to the demise of FICO.

Issue #1 – Either Congressional action or Comptroller/Fed rules are going to make banks change some of their business practices.  Specifically, banks will no longer be able to raise rates on universal defaults.    So how does that hurt FICO?  Because banks can’t use universal default to raise interest rates, banks don’t have to pay to monitor consumer accounts monthly anymore.   Why bother checking if someone is late on another bill if it doesn’t impact the bank?   The bank already knows if you’re late or not so why pay for that service?

Issue #2 – Banks are more concerned with verifiable employment (and history) and current income (and history) and cash available before underwriting any new major loans, FICO score seems to have moved to the bottom of the rung so why pay a premium for this information when it only impacts 10% (assumption) of the underwriting standards?  The only thing banks might need to see on a credit report is outstanding debt.

Issue #3 – Trust.  There have been so much “tweaking” and “system gaming” that FICO has taken a credibility hit.  Why are we in this financial crisis after all if FICO was supposed to keep bad loans from happening?  Wasn’t FICO such a marvelous system so optimized and tweaked that no bad loans could ever be written with this system?

Issue #4 – Self – Reliance.   Because banks made so many bad loans, it will behoove them to consider creating their own credit standards and reporting mechanisms rather than relying on FICO.   We are entering a new regulatory environment and you can’t keep doing the same thing and expect different results; that’s insanity!

Issue #5 – Consumer sentiment.   Let’s face reality here, no one is buying cars, houses or much of anything else so consumers don’t care about their credit scores because they have no plans on buying anything.   Commercial consumers don’t want FICO and public consumers don’t want their credit scores so who’s going to pay?   People across the country continue to get their credit lines cut and invariably their credit scores are dropping so why care?  There’s nothing a consumer can do about a bank arbitrarily cutting consumer credit lines so FICO scores are not only wrong, they’re pointless.

My best guess is that FICO has about 18 months of life left in it based on deteriorating economic conditions.   It may be acquired by a bank or a credit agency or be replaced by something more innovative.   In any event I won’t be shedding any tears for FICO.