Congressman questions FICO formula in light of falling credit

Credit watchdogs and an Illinois congressman are questioning the formula used by Minneapolis-based FICO to calculate credit scores for millions of consumers.
Bloomberg reports that banks arbitrarily cut spending limits for at least 30 million Americans in the second half of 2008. That means many are borrowing a higher percent of their available credit, which hurts FICO scores.
Rep. Luis Gutierrez, D-Ill., says FICO's formula is flawed because the credit-limit reductions don't reflect anything about the individual's risk. And a U.S. PIRG officials also questions the score's accuracy.
Banks have scaled back lending during the deepest U.S. recession in five decades. The Federal Reserve's quarterly survey of senior loan officers released May 4 showed about 65 percent of banks lowered credit limits on new or existing credit-card customers, compared with 45 percent in the January survey. Consumer credit, which includes credit card and auto loans, was $2.52 trillion in April, according to a Fed report released this month.
FICO CEO Mark Greene defends the company's methods: "It's not obvious to me that having the score change because of limit cuts is the wrong thing. The bank's action may signal a riskier environment and the view that you are a riskier consumer."
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