This week, the for-profit company responsible for calculating most of our credit scores announced some "new and troubling findings."



Consumers with high FICO scores (we're talking 760 to 789) are now more likely to default on their home loan than on their unsecured credit card debt, Fair Isaac Corp. said.



This reversal of a long-held tenet came about not only because of the bad economy, company CEO Mark Greene said, but also because of "counterintuitive trends in consumer behavior."



Let's see. Would that be like walking away from a home worth less than what you paid for it?



Fair Isaac's announcement is almost laughable. Perhaps unintentionally, it points to a major problem facing FICO, its competitors and lenders -- credit scores aren't as accurate as they used to be.





Factors behind your credit score

Payment history, including adverse public records (35 percent)

Amounts owed (30 percent)

Length of credit history (15 percent)

Credit limits (10 percent)

Types of credit used (10 percent)

Median FICO score, April 2009: 713

SOURCES: Federal Reserve Bank of Philadelphia; Fair Isaac Corp.

It also shows why you shouldn't be as concerned about your credit score as this industry wants you to be.

Credit scores are based on history, after all. And history has changed.

The main question is this: If people with great credit scores are defaulting more often than expected on their real estate loans, how can lenders rely on the scores?

I posed this question Thursday to Barry Paperno, consumer operations manager for Fair Isaac.

His response: Good question. We'll get back to you.

(The company responded in writing on Friday: "The newest FICO ... formula does the best job yet of any score on the market." See the firm's full response in the comments below.)

Another question with no clear answer: How will scores going forward reflect the extraordinary times of the past two years?

'Free' credit report ads can deceive

New rules taking effect in the coming year could curtail deceptive practices.

The credit reporting industry has gotten good at convincing people they need to know their credit histories -- even scores -- on an annual basis.

Unfortunately, they've also used some deceptive tactics to market these scores, leading consumers to pay for reports they thought were free.

That practice could be curtailed in coming months, thanks to new rules taking effect in April and September. Last week, the Federal Trade Commission amended its rules so that Web sites advertising "free" credit reports must link to free credit reports mandated by the government.

The confusion started seven years ago when Congress passed the

. It required the three major credit-reporting bureaus to provide consumers a free report each year. The law did not, however, provide scores for free -- you must pay extra for those.

The site where you can get reports entirely free is

. (You can also call 877-322-8228.)

But the most logical address -- FreeCreditReport.com -- belongs to Experian Information Solutions Inc., one of the credit bureaus.

You can indeed go to that site, get a credit report and, for an extra $1, your credit score.

But unless you read the fine print, you might not know that when you enter your credit card information, you also sign up for Experian's credit-monitoring program. That will cost you $14.95 a month. It will be deducted right from your card account, unless you cancel within a seven-day trial period.

Thanks to this less than straightforward marketing, Congress this year ordered the FTC to put a stop to these practices. Starting April 1, online advertisers of "free" credit reports must post a notice directing consumers to the FTC's site,

, and

.

Ads on TV and radio must comply with the new rule by Sept. 1.

Of course, it doesn't help that the three major credit bureaus fold errors into your credit reports, essentially requiring you to check them regularly.

Just remember when you're searching the Web for your complimentary credit report to use "annual," not "free."

--Brent Hunsberger

Will they factor in the irresponsible lending, exotic financial instruments and irresponsive banks that forced people into short sales, foreclosures and other credit-damaging circumstances? After all, many borrowers with good credit scores took out subprime loans as the housing boom gathered steam, for reasons ranging from greed to naiveté to fraud.

Paperno's response: We will. We've adjusted before. Trust us. "We are always redeveloping the scores based on the most current data available," he said.

Unfortunately, that's about all we can do. Trust Fair Isaac. Because the methods the company and its competitors use to develop credit scores are closely guarded.

Yet these numbers, in the recent debt bubble, wielded tremendous power.

Think about it.

Credit scores and their close cousins affect your homeowners and auto insurance rates. They can determine the interest rate offered on your mortgage. They can dictate the kind of credit card you get.

Even utilities are considering reporting billing histories to the nation's major credit-reporting bureaus.

"The credit score agencies' job is to sell credit scores," said Calvin Bradford, a sociologist based in Virginia and longtime consultant for lenders on community reinvestment issues. "They've been very, very good at selling credit scores to consumers. And to every industry you can think of."

Economists say there might not have been anything wrong with FICO's scoring system before the downturn, per se. Lenders simply leaned too heavily on it.

In the height of housing run-up, lenders -- especially subprime lenders -- approved mortgages based solely on a person's credit score. They did this as fast as they could, because volume was key to their success, and nobody wanted to be left holding these "no-doc loans" when they went bad, Bradford said.

A 2005 study of mostly community banks found nearly half used credit scores and, most specifically, the score of the small-business owner, to underwrite small-business loans. This surprised authors, since community banks trumpet how they lend based on relationships and other "soft" information.

In short, we became addicted to credit scores as we became hooked on debt.

Now, as we discard our debt, we need to end our credit-score fix, too.

Fortunately, we've already started.

to limit many employers from using credit histories in hiring decisions. Washington already has restricted the practice.

Late last year,

Farmers Insurance Co. of Oregon $10,000 for violating state law when it used credit histories to re-rate customers' auto and homeowners' policies (insurers still can use credit scores to deny you initial coverage).

"The problem is, certain entities are using credit scores for purposes they're really not appropriate for," said Chi Chi Wu, a staff attorney with the National Consumer Law Center, a consumer advocacy group.

Paperno, of Fair Isaac, answering a different question, echoed this assertion: "The score isn't a tool to reward you or penalize your past behavior. It's more to take what you've done and predict (behavior) based on that."

Even lenders are questioning the scores. So says John Enyart, president of Portfolio Financial Servicing Co., a Portland-based loan servicer. His firm manages the billing and payments -- even some credit evaluations -- of $9 billion in commercial and consumer loans. Enyart said lenders for months have been questioning why credit scores didn't predict the default rates they now see in their portfolios.

"The credit scoring model is broken," he said. "It has not held up the way we anticipated it would have."

So, here's what I suggest: Check your credit report every year if you want. But don't pay to know your score if you're not applying for a loan. It doesn't matter that much. Most consumers have a good idea of what it is anyway.

Nearly two in three consumers accurately estimated their credit scores in 2000, according to a study by George Washington University marketing professor Vanessa Perry. Only 5 percent underestimate them.

The nearly one-third of folks who overestimated scores, the study found, generally are less knowledgeable about what affects their scores and less likely to budget, save or invest regularly, Perry found.

Those results tell me that most of you don't need to obsess about how to improve your score. Borrow responsibly, and a good lender will lend you money whether your score is 650 or 750.

Pay your bills on time. Don't keep high balances. Borrow only when necessary.

Think twice before opening a new card or line of credit. And if your card reduces your credit limit, there's a simple fix. Cut your balance outstanding, and your score should correct itself, Paperno said. Because your score is based on the gap between your total balances and your total credit line, not the credit line itself.

Right now, Fair Isaac's latest scoring model, FICO 8, is being rolled out to lenders. Unfortunately, it's based mostly on loans made before the crisis. And Paperno could not say when a newer model would replace it.

So, the assumptions behind these scores, until further notice, were not based on today's reality. As Greene of Fair Isaac suggests, we consumers no longer behave intuitively.

At least, not to the intuitions of FICO's mathematicians.

"Credit scores were built in good times," Wu said. "It remains to be seen whether the mathematicians in FICO can adjust the models for bad times."