Funny FICO scores

The roots of the credit repair industry go back to 1970, when Congress said credit bureaus have 30 days to correct errors in consumers' credit histories after they are brought to their attention.

Now, with delinquencies and foreclosures on the rise and lenders tightening their underwriting standards, there's some controversy over the apparent ease with which FICO scores can be boosted, and debate about how useful they really are.

Many of the techniques used by credit repair companies to help consumers boost their FICO scores are legit. They can help clear up out-of-date, inaccurate or duplicated "derogatory items" on a credit report. These companies also offer advice any consumer can take advantage of -- borrow money to pay off other debts, open more credit card accounts -- which can sometimes boost FICO scores.

Other advice and services are more dubious. Getting added as an authorized user to a friend or relative's credit card account can help if they've got better credit than you do, and some companies even offer to put you on a stranger's credit card account for a fee.

Mortgage lenders don't rely on FICO scores alone, but they're a big part of underwriting decisions and a potentially serious obstacle to home ownership for borrowers with scores below 620, who are labeled subprime.

There's ample evidence that spending a few hundred dollars with a credit repair company can boost a borrower's FICO score out of subprime territory -- an expense that's easily recouped in a few (or even one) lower mortgage payments.

The result could be that FICO scores are becoming a less reliable a predictor of loan default. According to Fitch Ratings, the gap in scores between loans that default in their first year and those that are still current dropped from 30 points in 2003 to 10 points last year. New Century Financial Corp. was able to boost the FICO scores on its loans from 600 in 2003 to 633 in the first quarter of 2006, but still ended up in bankruptcy.

The Federal Trade Commission, at the request of credit bureaus, is looking into the manipulation of FICO scores.

The issue is explored in greater detail this week by Reuters and in a recent Kenneth Harney piece. 

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