Most of us know Uncle Sam pretty well.  Some of us may be somewhat unfamiliar with with another significant relative in the American monetary landscape...Mr. Fair Isaac. So, here's a quick history lesson. 

Fair Isaac came into being in 1959 as the creation of two brilliant people:  Mr. Bill Fair who was an engineer and Mr. Earl Isaac, a mathematician.  Together they developed a system which was initially designed to help banks and retail stores to calculate how likely their customers were to pay their bills in a timely fashion.  

It was a brilliant concept.  Based on a closely guarded mathematical formula, a three digit number was assigned to an individual's history of interaction with credit to predict their future spending and payment patterns.  It was financial wizardry at its finest.  Until, the mid 1980's Fair Isaac scores were not used as the major criteria for lending in the housing market.  Mortgage Lenders documented their loans through analyzing a large volume of data about the individual borrower which included: pay stubs, bank balances, tax returns, retirement portfolios, asset portfolio and employment history.

But everything changed when Fair Issac became a public company and subsequently the darling of the banking system when it came to rating a borrowers ability to qualify for a mortgage loan.  According to the latest Business Week Special report of February 2008, in an article entitled "Credit Scores: Not-So-Magic-Numbers,"  1996 marked a huge turning point for American cconsumers when Fannie Mae and Freddie Mac, the largest wholesalers of mortgages  began requiring FICO scores on every loan they bought from lenders.  1996 was the year I became a full-fledged real estate agent.

Back then, we were all trying to figure out what this would mean for our clients.  Some Mortgage reps provided long lists of what could potentially impact a score.  There was some nervousness of how all this would play out in buyers being able to qualify for financing.  This was long before the days of the credit card doctors and the mortgage repair teams.  We were assured that this "magical" score was FAIR and would help alleviate mortgage discrimination.  All would be well.

No one could have imagined what would take place over the next decade and how much would change.  Who could have predicted that the real estate boom would spur such an incredible plethora of mortgage products? Who would have imagined mortgage bundles being sold worldwide in a manner similar to stocks?  The FICO score became the fuel that juiced the twin engines of progress and economic expansion. 

Today, FICO scores are used for more than most people would have ever dreamed about when they were first presented in the public arena.  Did you know that your insurance rate is often determined at least in part by your FICO score?  Your FICO score is also checked by many employers prior to an offer for a job.  Were you aware of the fact that some hospitals have started checking FICO scores prior to admitting patients?

According to this Business Week article, there are some major drawbacks with this expanded use.  Even as FICO scores are being used to determine more and more things about how our lives are lived...they are becoming less accurate.  It is a well know fact that FICO scores can be manipulated.  Entire industries have sprung up to raise the "number"  for consumers who need a higher score to facilitate a home purchase or other financial endeavor.  In addition, it is a widely know fact that the information which is used to create the score is not always complete or true. With fraud on the rise, consumers are encouraged to check their scores at least once a year to review what is in their credit file.

With this in mind...it is disconcerting to see that as the accuracy of the model has decreased, it's use to determine issues as critical as your livelihood or an admission to a hospital for critical care are on the rise.  I find it a little disconcerting to think that while a confrontation with Uncle Sam could cost consumers money...issues with his relative Mr. Fair Isaac might affect your right to receive life giving treatment.  Does that seem right to you?

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