Saturday, September 01, 2007

Bias In FICO Scores?

The Post reports that the Federal Reserve has completed a study of possible bias in FICO scores (the most widely used score affecting eligibility for credit):

Critics have questioned the accuracy and fairness of credit-score models, charging that in some cases they are inherently biased against minority groups such as blacks and Hispanics.

After a research effort over several years that focused on three credit-scoring models -- including one created by Federal Reserve staff economists -- the central bank concluded that:

? Credit-score statistical models are not biased against any demographic group and are highly predictive of future payment performance. Lower scores correlate strongly with future delinquencies; higher scores are associated with good payment performance.

? Blacks and Hispanics, on average, "have lower credit scores than non-Hispanic whites and Asians."

? Younger individuals of all demographic groups have lower credit scores on average than older people, in part because credit-scoring models focus on payment histories and length of credit accounts. Younger consumers generally have fewer accounts and shorter payment histories.

? The payment performances of some demographic groups differ from what their numerical scores might suggest. For example, according to the Fed, "blacks, single individuals, individuals residing in lower-income or predominantly minority census tracts show consistently higher incidences of bad performance than would be predicted" by their credit scores. On the other hand, "Asians, married individuals, foreign-born (particularly, recent immigrants), and those residing in higher-income census tracts consistently perform better than predicted" by their credit scores.

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