FICO Scoring is Flawed

[Anonymous]

Hello folks. Bear with me, I just want to vent a little. I am sure no-one at FICO will even bother to consider my arguments, but I will pretend that someone cares for my own sake.

A little about me...

I owe a lot of money on credit cards. I shut down two businesses around 2001 to pursue a different career which has struggled at times, but is now stable.

I took advantage of a lot of the low balance transfer rates credit card companies were offering and I transferred most of my debt to the low interest rates. I now owe my mortgage and credit cards. No auto loans, no any other loans... nothing else.

I have never missed a payment, never been late.  EVER! I'm not talking about just in the last 1, 2, 3, 5, 7, 12 years.... N E V E R even late once! NEver filed bankruptcy. Never been divorced, never had a tax lien, never been in collections for anything!

In spite of this SPECTACULAR payment history my score has fallen.

Now, the timeframe this happened in...

So banks started lending money to people who didn't/couldn't pay and they got themselves into trouble. BANKS made some bad decisions. BANKS are now struggling to make money (their fault, not mine).

I start getting notices that my credit cards are going to raise my interest rate and the only way I can keep from it is to close the account and continue to pay by the current terms. The really funny thing is to see some of their excuses for wanting to raise my rates: "to maintain profitability", "due to infrequent purchasing", "low payment to balance history" , and other BS. So I say, "fine - I was only using them for debt reduction anyway". So I close about 3 accounts to keep from the rates going up (keep in mind they are going up NOT because of anything I did!).

By closing these accounts to keep from being screwed for nothing I did wrong - my FICO score drops because average length of account is now lower and my debt-to-credit ratio is now worse.

This brings me to my first problem with FICO scoring: I only closed the accounts to keep from being taken advantage of! I DID NOTHING WRONG! Am I supposed to sit back and let desperate banks just take advantage of me because they want more money??? How is that FAIR?!?!

Well, now that my credit score is lower all the banks that couldn't come up with an excuse to raise my rates now had one: a drop in my credit score.

Some banks however, did something different. They decided to lower my credit limit because of my now lower credit score. This, in turn, lowers my score even more because my debt-to-credit ratio is worse!

This is my SECOND FAULT WITH FICO: debt-to-credit ratio not only can be affected by the user's decisions, but by the lender's decisions. Credit score should reflect THE USER'S credit responsibility and trustworthyness, not the banking industry's health (or lack thereof). If banks just wake up one morning and decide to take away credit availability, they will damage everyone's credit.

I haven't changed. I pay my bills like always. On time, all the time. The only thing that has changed is BANKS. They are hurting. WHY IS MY CREDIT SCORE REFLECTING THEIR HEALTH!!! This is MY credit score - not theirs!

So now I am stuck with a bunch of credit cards with rediculous rates and a bad debt-to-credit ratio because my credit limits are constantly being reduced to $5 above my balance.

So who is at fault???

a. me - keep in mind, I have never missed a payment to anyone, ever. Regardless of all the "ancillary" factors effecting my score - the most important one (payment history) is FLAWLESS!!!

b. banks - they started this crap. They made bad lending decisions, raised my rates for no good reason at all, and directly hurt my credit score by lowering limits (and affecting my debt-to-credit ratio)

c. FICO  - for having a flawed system so that a person's credit score can be damaged by trying TO PROTECT THEMSELVES FROM BEING TAKEN ADVANTAGE OF (closing accounts to avoid unreasonable changes) - and - a person's credit score CAN BE DAMAGED EVEN IF THE PERSON HAS DONE NOTHING WRONG (banks lowering limits).

I refuse to take the blame for this. This is FICO's fault for a flawed scoring system.

[SCF]

First, welcome to the forums!

You're right, the banks have taken some actions that can be considered unfair to people who have traditionally been considered "good customers" and therefore been insulated from rate increases, and credit line decreases.  You're also right that the FICO scoring system is far from perfect and that it can be heavily effected by issues that are outside of the consumer's control.  In the end, both FICO and the banks are not working based on what is best, or most fair, or most accurate for each individual consumer.  They use statistics to figure out what is the most true for the most people and work from there, which means that at every point, someone is going to be misrepresented by the model.

That said though, you are the only one who can do anything to improve your situation.  The banks have not violated their contracts with you, and whether or not the FICO model works for your particular case, it works well enough for nearly every lending institution in the US to help them make decisions.  What you need now is to take responsbility for the things you can impact: the amount of your debt, how you are paying it off, and who you owe the money too and do the best you can to improve your situation both financially and in terms of your FICO score.  You've come to the right place for help.  If you're willing, give us some more information about your situation, and people here will give you advice on what you can do to get your debts paid down and get back in control of your FICO.

Good luck!

[Anonymous]

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@Anonymous wrote:

*SNIP*

c. FICO  - for having a flawed system so that a person's credit score can be damaged by trying TO PROTECT THEMSELVES FROM BEING TAKEN ADVANTAGE OF (closing accounts to avoid unreasonable changes) - and - a person's credit score CAN BE DAMAGED EVEN IF THE PERSON HAS DONE NOTHING WRONG (banks lowering limits).

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You made the rather harsh and probably not well thought out decision to close multiple accounts for no reason other than an APR hike. I'm sorry, but APR hikes are the current standard across the industry. Period. I've seen my APR's go from 13%-18% up to 25%+, while improving my score. This is just the way it is right now. How much of a balance are you carrying on those accounts? Was paying them off a possibility?  I'm sorry, but you apparently already knew how the system worked. You knew that closing three accounts would screw up your credit score. You did it anyway. You could have just as easily weathered the crapstorm we're all going through right now. It might not be your fault or my fault, but pretending the problem doesn't exist and shouldn't apply to you is ludicrous.

That said, I agree that this does expose huge flaws in FICO scoring. By not taking closed accounts into consideration when figuring the AAoA, FICO is selling many of us short. I'd have credit history going back ten years were it not for my old book club account (which, oddly, found its way into my credit report for a while) being closed. It's a flawed system, yes, but it's about the best you could realistically manage with around three hundred million people to keep track of. 

[Anonymous]

I guess it doesn't matter whether you take the blame or not, you are stuck with your score.  Unless you take actions to change it.  

The system "works as well as can be expected"  I would argue that since there is only one system, there is no way to test whether the system is working or not.   I know when I worked in like insurance, we never really knew how profitable a product was until years had passed.  By that time, the product was no longer being sold, so it really had no bearing on the current products being sold.

Also, since the lender will never have the payment history of those who were denied credit, there is no way for the lender to verify that the FICO scores actually work to predict default.

But FICO has accomplished the same thing that the ACT and SAT scores have done for college admissions.  They have convinced an entire group of decision makers that their somewhat arbitrary index does indeed predict some level of future performance.

[Lel]

Please remember to be friendly, supportive, and respectful of other members of the forums.  Thank you.

[Anonymous]

FICO just automates what was once a manual review of every credit application and tries to prevent arbitrary decisions.  Is it perfect?  No.  Is it flawed?  Of course it is.  And so was the old system of 100% manual review.

Fortunately there are still credit granting institutions that don't rely 100% on only a credit score.

[Anonymous]

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@Lel wrote:
Please remember to be friendly, supportive, and respectful of other members of the forums.  Thank you.

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Good point. Reading my post again it does seem a little bit harsher than what I intended it to. I'll be more careful in the future. 

 Alchemy: Apologies if my post upset you. The point I was trying to get across was that you made the choice to take that particular course of action, knowing it could harm your score and overall report. That said, I don't think anyone could forsee the kind of trainwreck that could lead to in the current economic climate. The best you can do at this point is see where the ball stops rolling and rebuild from there. It's only through such strange occurrences that we see flaws that didn't exist even two years ago. 

It sucks, but let's be honest here... it's chiefly the fault of the banks that loaned money to people that couldn't pay, not the FICO score.

[Anonymous]

Your situation is a perfect example of how vulnerable we are to "the system"  of credit.  Maybe  a lession for all of us regardless of our well establish payment history if to not seek thousands of dollars in CL.   It is very concerning to see post of CLI request and how much total credit limit one has.   Really!.   You are an example for all of us.   For those who think FICO is perfect well it is.  I do  think you did should have been more educated, either not to have so much in credit limit , not to caryy hefty balance business or not and  not to close the cards at all ( well not so many) and when you closed them open others to replace your loss.   This market is an exception - not the rule in the initial crisis this board was full of survival strategy.  However the lessons it taught should be the rule form now on. 

Live within our means.  save more ,  play the system you need credit to have good credit but in order for this to benefit you be an educated credit consumer.   Protect yourself,  have enough credit to play the system, but carry little to no balances -  0 balance still equal 0 utilitiy in any language even math.   so if a card is closed it is still 0 no harm no foul.   Do not get caught for non usage either like all of us buy a sock or two every other month beeter yet if you drive rotate your cards buying  gas .  Play the system do not get killed by it.

So pay your balance down, hopefully it does not get chased to closure.  Close no more cards and ride the market out.  Your score will rebound and you will be smarter for it.

[MarineVietVet]

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@Anonymous wrote:

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You made the rather harsh and probably not well thought out decision to close multiple accounts for no reason other than an APR hike. I'm sorry, but APR hikes are the current standard across the industry. Period. I've seen my APR's go from 13%-18% up to 25%+, while improving my score. This is just the way it is right now. How much of a balance are you carrying on those accounts? Was paying them off a possibility?  I'm sorry, but you apparently already knew how the system worked. You knew that closing three accounts would screw up your credit score. You did it anyway. You could have just as easily weathered the crapstorm we're all going through right now. It might not be your fault or my fault, but pretending the problem doesn't exist and shouldn't apply to you is ludicrous.

That said, I agree that this does expose huge flaws in FICO scoring. By not taking closed accounts into consideration when figuring the AAoA, FICO is selling many of us short. I'd have credit history going back ten years were it not for my old book club account (which, oddly, found its way into my credit report for a while) being closed. It's a flawed system, yes, but it's about the best you could realistically manage with around three hundred million people to keep track of. 

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Your AAoA is the sum of the ages of every account on your report, whether open or closed, calculated in months, divided by the number of accounts and then divided by 12. I use the division by 12 to make it easier to convert into years. This is measured from the time each account was opened until present.

From a BK years ago to:
7/09 TU-742 EQ- 779
8/09 TU-765 EQ- 783
9/09 EX pulled by lender 802

You can do the same thing with hard work

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[JoeBJay20]

Welcome to the forums!

You have to keep in mind that the FICO algorithm is designed to predict credit risk for millions upon millions of people.  Since the algorithm does not account for your income, it can only track your debt.  Whether you are aware of it or not, even without ever missing a payment, you are a bigger credit risk when you carry larger balances, since larger balances increase your potential for defaulting.   While we would all agree that banks can engage in the crummiest of behavior, a rate jump isn't always the best reason to close an account.  Your credit score didn't go down because the closed accounts hurt your AAoA, but because those closed accounts hurt your utilization.  You still have the same amount of credit card debt, but now you have less overall available credit.