Fair Isaac

On the evening of Sept. 28, 2026, Bill Pulte posted on X that VantageScore will move to the existing Classic FICO grid, effectively removing the 20-point haircut on loan-level price adjustment (LLPA) grids. Shares of Fair Isaac tumbled 20%.

Why it matters: Pulte stated that having two separate pricing grids "makes zero sense." We disagree, as VantageScore 4.0 and Classic FICO have different distributions. In addition, the Urban Institute has noted that VantageScores tend to average 13 points above a Classic FICO score. While the move will result in more VantageScore mortgages to be underwritten, we think the underlying score-shopping calculus remains unchanged. In addition, Rocket Mortgage announced that VantageScore will be the preferred scoring model for Fannie Mae and Freddie Mac eligible loans. Our best guess is that the “preferred” means that if Rocket pulls both a VantageScore and FICO score and they produce the same result from the government sponsored entities' perspective it will go with VantageScore. We still think it will make sense for Rocket to pull both scores, as a borrower’s FICO and VantageScore can differ significantly. The exception would be when VantageScore already falls in the top pricing bucket. However, because obtaining an additional score generally requires paying for another credit report, we do not think a sequential setup makes much sense.

The bottom line: We expect to lower our $1,250 per-share fair value estimate on wide-moat Fair Isaac by a high-single-digit percentage as we adopt more conservative volume and pricing assumptions. While we reiterate our High Morningstar Uncertainty Rating, we think the market reaction was overly severe. The GSEs seem willing to cede lower earnings from favorable LLPA grids, and this is not something we’d expect in the non-GSE mortgage market. The timing of Pulte’s recent actions may be intentional, with the moves coming just as Fair Isaac and the bureaus make their annual pricing decisions.

We also note that there was no mention of a change in mortgage insurance capital grids (about 30% of GSE mortgages require insurance). We believe mortgage insurers will care about credit losses, the score being used, and the rationale for score selection.

TransUnion and Equifax were both down about 4%. We did not see anything fundamentally negative to their business models in either announcement. We suspect the reason for their decline is fears of a bi-merge reemerging or Pulte altering the pricing strategy for mortgage credit reports.

Ahead of Fair Isaac's mortgage score pricing decision for calendar 2027, we are lowering our fair value estimate to $1,140 per share from $1,250. We take a more conservative view of mortgage score pricing in fiscal 2028-30, assuming 5% annual growth versus 7.5% previously. We also assume 85% market share in fiscal 2030 versus 90% previously, to account for lenders that may opt to forgo FICO scores in certain circumstances. We still think that in most cases it will make sense for lenders to pull both scores and use whichever produces the more favorable result. In addition, we believe VantageScore still faces meaningful hurdles in the non-GSE mortgage market.

Our fair value estimate equates to 26 times our fiscal 2027 GAAP EPS estimate and 23 times adjusted EPS, which excludes stock-based compensation. Although these multiples may seem high, Fair Isaac's scores segment has demonstrated strong pricing power, and because the business is largely fixed-cost, incremental revenue in this segment tends to flow to the bottom line. In addition, mortgage volumes are currently depressed. We use a weighted average cost of capital of 8.3%.

We project revenue to grow at a 12% compound annual growth rate over the next five years, versus 13% previously. Scores segment adjusted operating margin was 88% in fiscal 2025, leaving little room for expansion. The software segment, with a 30% adjusted operating margin, has more room to improve, and we expect it to exceed 35% by fiscal 2030. Segment adjusted operating margins exclude unallocated expenses and stock-based compensation, so "true" margins are lower than they appear.

Scores generate over 80% of the firm's profit and are growing faster than software, making them the most important driver of our forecast. We forecast scores revenue to grow at a 16% CAGR from fiscal 2025 to 2030, with mortgage score revenue growing fastest at 23%. Mortgage score prices doubled in calendar 2026, and we model 5% annual price growth in fiscal 2027-30, although we acknowledge a wide range of outcomes. We expect nonmortgage B2B scores revenue to average about 11% annual growth during our forecast period, driven by pricing and volume, and B2C scores revenue to grow about 6% per year, in line with fiscal 2025's growth.

The scores segment provides over 85% of Fair Isaac's profits, so it is the primary determinant of the firm’s overall wide Morningstar Economic Moat Rating. We believe Fair Isaac has a wide moat in its scoring segment with a network effect as a moat source. Once a credit benchmark such as a FICO score gets adopted by many stakeholders (banks, investors, regulators, and consumers), it becomes difficult to displace.

In general, we believe there are two main use cases for FICO scores. The first is to make an underwriting decision for an individual loan. The second is as a benchmark for credit quality among various stakeholders such as originations, investors, analysts, and regulators.

We do not believe the underwriting use case is particularly moaty. Many lenders do not use or do not heavily weigh FICO scores for consumer lending decisions. Underwriting is a highly differentiated and often proprietary process for a lender. Capital One, for instance, differentiated itself with an “information-based strategy” that used information technology and sophisticated analytics. More recently, buy now, pay later fintech Affirm noted in its annual report, “We consider data beyond traditional credit scores, such as transaction history and credit usage, to predict repayment ability, and leverage this with real-time response data.” However, for lenders that do use FICO scores as part of the underwriting process, we acknowledge some switching costs exist, such as having to test a new score’s efficacy, training employees on a new scoring methodology, and integrating the new score and reason codes (Fair Isaac provides reason codes to explain why a consumer does not have a high credit score) into the bank’s internal system.

It is the benchmark use case that we believe gives Fair Isaac its wide moat. Even if loans are not underwritten using FICO scores, originators still use FICO scores as a way of communicating their credit quality. As an example, since 2014, CarMax has disclosed that for its auto financing unit, “FICO scores are not a significant factor in our primary scoring model, which relies on information from credit bureaus and other application information.” Despite this, the firm’s latest car loan-backed asset-backed securities also reference a weighted average FICO score, indicating that utilization of the product is effectively unavoidable when involving certain stakeholders.

About 20% of scores segment revenue is from business-to-consumer offerings. About half of the firm’s B2C revenue consists of the direct-to-consumer myFICO.com offering, whereby the firm sells FICO scores and credit monitoring directly to consumers on a website. A use case would be a consumer tracking their credit scores before applying for a mortgage. We believe that FICO has strong brand awareness among consumers and that Fair Isaac has developed a brand-related intangible asset. The remaining part of the firm’s B2C revenue is from partnerships, such as with Experian. Experian switched from VantageScore to FICO in 2014 in its consumer offerings, which were struggling at the time.

The greatest rival to Fair Isaac, in our view, is VantageScore, a joint venture among the Big Three credit bureaus (Equifax, TransUnion, and Experian) founded in 2006. As the underlying data inputs for FICO scores are from the credit bureaus, FICO scores are typically sold by the three credit bureaus. The relationship between the credit bureaus and FICO could be described as frenemies. Shortly after VantageScore was launched in 2006, FICO sued VantageScore on grounds that its scoring system was confusingly similar to FICO’s 300-850 range, but the courts ruled against FICO. Other times, the relationship between the credit bureaus has been more cooperative. In 2014, Experian switched from VantageScore to FICO for some of its consumer offerings, which we view as a sign that FICO has greater credibility among consumers. Over 2018-25, Fair Isaac’s pricing increases appear to have benefited the bureaus, as they are using higher FICO score pricing to justify their own price increases. However, the firm's move to a direct license model announced in October 2025 aims to undercut credit bureau markups and has, in our view, hurt its relationship with the credit bureaus. However, even if VantageScore is used for score shopping, we still think Fair Isaac's mortgage scores have a moat. Fitch Ratings caps non-FICO classic scores at 10% of the loan portfolio for residential mortgage-backed securities ratings due to the lack of performance data of alternative scores, suggesting a higher cost of capital for VantageScore-originated loans. In addition, Fannie Mae generally has higher capital requirements for mortgage insurers on subprime VantageScore mortgage loans versus FICO-underwritten loans.

From an environmental, social, and governance perspective, access to credit, including for homeownership, is an important issue for policymakers, particularly across demographics. In July 2025, the Federal Housing Finance Agency announced it will allow VantageScore but will keep the trimerge requirement. We view the inclusion of VantageScore as a win for VantageScore. However, with FICO scores still being accepted, we view the moat as still being intact even if the firm takes a revenue hit from fewer scores being provided.

Fair Isaac possesses aspects that are common in network effect businesses, such as a winner-take-all dynamic (FICO generates the vast majority of credit score revenue and in the securitization market boasts a 95%-plus share), a highly scalable business model (scores has adjusted segment operating margins of over 80%), and meaningful pricing power. Fair Isaac’s software unit generates less than 15% of the firm’s operating income, so it does not inform our overall moat rating.

Fair Isaac has a long runway to increase prices, since it's a small cost but critical for lenders. The use of mortgage performance-based fees offers another avenue for price realization.

Fair Isaac has shown great capital allocation by having optimal leverage, repurchasing shares, and avoiding pricey and distracting acquisitions.

VantageScore will not gain traction in mortgage, as it will only be pulled alongside—rather than in lieu of—FICO and its loans will often incur a higher cost of capital.

The FHFA decision to allow VantageScore for government-conforming mortgages will alter its pricing strategy and could result in VantageScore gaining traction in both mortgage and nonmortgage markets. In addition, VantageScore could gain traction for mortgage prequalifications.

Fair Isaac's revenue has shifted toward mortgage scores due to price increases, and mortgage volume growth may continue to prove elusive as interest rates rise.

The government-sponsored entities may take their time to allow FICO 10T and the direct license program for GSE mortgages.