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On the morning of Oct. 8, 2026, TransUnion announced a first-look functionality for mortgage lending, and later that evening Equifax followed with a similar “Mortgage Score Select” offering.

Why it matters: Both TransUnion and Equifax essentially let a lender purchase the credit file with one score, review that score, and then decide whether to add a second score without repurchasing the credit file. In Equifax’s case, the second pull would be $1 more. We remind readers that on the July 2026 earnings call, Equifax’s CEO said the firm wasn't seeing a waterfall approach to scores because lenders would have to buy the credit file twice. These announcements remove that friction and make a waterfall approach possible, in which a lender buys one score first and then, based on that result, chooses whether to pull the second score. In many cases, it will still make sense for a lender to pull both scores and get the most favorable LLPA treatment for a conforming mortgage. The exception we see is largely in the top bucket, which currently covers credit scores above 780. Today’s update makes the waterfall approach more practical for a lender. TransUnion’s press release says the offering “allows lenders to start with credit report insights,” and we wonder whether these insights include an ability to estimate what a Fico score might look like.

The bottom line: We expect to reduce our fair value estimate for wide-moat Fair Isaac by a mid-single-digit percentage to account for potential volume headwinds from a waterfall approach. We maintain our recently reduced fair value estimates on narrow-moat Equifax and TransUnion. We also note that Experian has not indicated a similar offering as of now.

Big Picture: We reiterate our High Uncertainty Ratings for TransUnion, Equifax, and Fair Isaac. FHFA Director Pulte’s actions are hard to predict, and although he cannot directly regulate pricing on scores or credit files, they can have major consequences.

From where we sit as external observers, we find it hard to ascertain the GSEs’ appetite for lower economics in allowing score shopping with raising grids to continue. We note that in a Sept. 29 Substack post, former Freddie Mac CEO Don Layton was highly critical of Pulte’s implementation of VantageScore. He went so far as to state that a future FHFA director would need to change much of Pulte’s work to keep the benefits of having more than one score while minimizing the negatives. That said, and with the caveat that there has been leadership turnover at the GSEs, we find it somewhat curious that we have yet to see media reports suggesting internal reservations at Fannie Mae or Freddie Mac about the revised LLPA grid.

Of course, Fair Isaac may try different approaches to limit waterfalling, such as tier-based pricing or subscriptions, but these may result in Fair Isaac ceding economics. We continue to view adoption of the direct license program or DLP as Fair Isaac’s best shot at increasing its mortgage revenues through pricing. If Fair Isaac pursues that proposal, a tricky consideration will be whether to charge lenders or consumers on originated loans for which a FICO score was pulled but that ultimately closed using a VantageScore because of score shopping.

Also of note, Equifax has committed to $1 per score for VantageScore in 2028, which largely matches TransUnion’s actions.

After updating our model, we reduce our fair value estimate on Fair Isaac to $970 per share from $1,050 as we lower our mortgage volumes assumptions. The 30-year fixed rate mortage averaged 6.23% and 6.11% in the fourth (calendar) quarter of 2025 and first quarter of 2026, respectively, so mortgage volumes will face difficult comparisons at current rates in coming quarters. We also take a more cautious view of pricing and volumes in the firm's nonmortgage scores business.

We project revenue to grow at an 11% compound annual growth rate over the next five years. 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 be about 37%, versus 35% previously, by fiscal 2030 due to cost take-outs. On Oct. 6, 2026, Fair Isaac announced it would trim its headcount by approximately 15% in fiscal 2027. We suspect most of the reduction is in the firm’s software business. Segment adjusted operating margins exclude unallocated expenses and stock-based compensation, so "true" margins are lower than they appear.

Scores generated over 80% of the firm's profit and are currently growing faster than software, making them the most important driver of our forecast. However, we expect a slowdown in scores as the firm’s ability to take price is limited by regulatory and tactical considerations. We forecast scores revenue to grow 42% in fiscal 2026 as the firm doubled mortgage score prices beginning on Jan. 1, 2026. For fiscal 2027 to fiscal 2030, we expect scores growth to average 7% per year. Mortgage score prices were $10 per score, and we model $12.16 for calendar 2030. We cut volumes by 5% as the bi-merge may have implications for the firm’s pricing. In addition, we assume 85% market share in 2030 for mortgage. Over time, we expect Fair Isaac to adjust its pricing model to a performance model and to a bureau agnostic model. 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. We use a weighted average cost of capital of 8.3%.

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.