FICO Scoring is Flawed

[Anonymous]

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@MarineVietVet wrote:

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.

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Yeah, I wasn't specific enough. I've had closed accounts fall off my report before. The book club I used to be in reported to the CRA's (which I found strange...), but it doesn't show up anymore. I'm not certain why not, it sure as hell showed when it went into collection (this was ten years ago, so maybe that's why it disappeared).

[Anonymous]

I read the subject. My first thought was, And?

[Anonymous]

Thanks for the comments everybody.

*deep breath*

I am somewhat calmed down now. Please do not take any of this personally, anyone.

To answer some questions in short:

I owe a lot on c/c because I transferred most everything I owed (car loans, student loans, etc) to c/c accounts because of very nice introductory rates (0%, 1.99% etc) several years ago. I figured I could save a year or two's worth of interest befor ethe rate went to a "normal" rate. This also allowed me to lower the amount I was paying on those accounts so I could channel more money into paying off higher interest rate accounts I had previously to pay them off.

"Was paying them off not an option"... Really? If I could just pay them off - I would never need credit in the first place. Does anybody actually keep a running balance on purpose?

"Live within your means". Definitely good advise. Maybe I didn't hear it 15 years ago, but I do not use credit cards to buy ANYTHING now. Everything I buy is "positively funded". The cards are just a method for debt reduction.

"I should have know closing accounts would hurt my score" - Yeah, I did. But I did not think it would have such a massive snowball effect. A few points here, a few points there and sooner or later all my lenders were jumping on the downhill freefall. Each doing something to further hurt my score for the next one to see. Regardless of how much I owe or what my credit limits may be, the only thing lenders really need to know is that I pay my bills, always have, always will - without fail. They can "microanalyse" what I do with what I have, and form their own opinions about if they think I spend my money wisely or not. In the end, what I do is my business. All they need to know is that I have a long history of paying my bills on time.

"I am the only one that can fix it. It is in my hands." Not true. This is my whole point. If every lender were to just, for whatever reason, double my credit limit... My debt-to-credit ratio plummets, my score skyrockets. Did I do anything? Nope. I have done everything I could as far as my relationship with lends go, I have paid everything on time, all the time.

*sigh*

Here is what I have learned:

-FICO is not here for consumers. It is here for banks and lending agencies. It is not fair. It is not supposed to be.

-FICO does not reflect my creditworthyness. It reflects an arbirtary lender's desire to do business with me.

-Therefore, my score is not completely a reflection of me, but a bit of the lending industry's reflection also.

-It is all just a numbers game. Learn the rules. Play the game.

I love the credit fitness test a lot of people post in their signatures. It's good to have goals. So here is mine:

old score - I honestly don't know how low it got. Maybe 630-ish

current score: 707

goal: to get rid of all my loans and get to a point financially where my score doesn't matter anymore because I won't need to submit myself to the tyranny that is the banking industry.

[Anonymous]

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@Anonymous wrote:

"Live within your means". Definitely good advise.

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Unfortunately, it's a crock. Read "The Two-Income Trap" by Liz Warren. The price of stuff has been rising faster than wages for decades.

[Anonymous]

Update! 11/12/10

Ok. After many hours of figuring out how I am going to beat this system. I have come to a realize something important:

When I get my score to a point where I consider it "good" - I will also be in a position to never need a credit score.

So, my goal more perfectly defined is I would like to get to a point financially where my score doesn't matter. Then FICO can keep their flawed system that reflects not me, but a conglomeration of assumptions about me, the industry as a whole, etc...

Anyway, here is what I have done:

I borrowed $12000 from my grandmother to expand my house thus increasing the value.

I went to several banks and shopped for a good refinance rate. I explained to them that I was going to refinance 80% of the value of my house and use what equity I had to pay off as many cards as possible. highest interest rates getting priority. I was NOT going to close any accounts after they were paid off to avoid a score drop due to closing the accounts.

I refinanced the house andf paid off almost $40,000 in c/c debt (I told you I had a lot). sad thing is I still have quite a bit left. Let's just put it this way, every time I hear one of those "debt consolidation" commercials and they say "do you have 10,000 , 20,000 , 40,000 in c/c debt?" I laugh and say that if that's all I had - I'd be home free! Anyway, It's a done deal now since August. I realize that it would take some time for the information to find it's way to FICO so they can adjust my score accordingly...

September...

October...

November....

Seriously!?!? I just paid off $40,000 in c/c debt!! Is anybody paying attention???

Now I am convinced FICO is BS! I have moved $40,000 from unsecured to secured debt and my score has DROPPED. That's right dropped! Granted it's only 14 points. But STILL! This is supposed to IMPROVE my score! According to this very website's score predictor my score should have gone from 700 to 760-ish.

Alas. Here I sit at 691. (it went up 5 points since the 14 drop for some unknown reason).

Do I regret expanding & refinancing my house? No. It has reduced my overall interest rate by almost 3.5% and I am paying a lot less in interest every month. More money is now going towards balances and not interest for this reason I am making greater strides towards paying everything off.

It's a shame so much rides on a person's credit score and it is as pathetically unrealistic as it is.

I will come up with another scheme to improve my situation, but as I mentioned before, the ironic this is that if I get my finances where I want them I won't care about my credit score because I won't need it any more.

[marty56]

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@Anonymous wrote:

Now I am convinced FICO is BS! I have moved $40,000 from unsecured to secured debt and my score has DROPPED. That's right dropped! Granted it's only 14 points. But STILL! This is supposed to IMPROVE my score! According to this very website's score predictor my score should have gone from 700 to 760-ish.

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There could be many reason for the score drop.  New loan, INQ lower AAoA.  The simulator assums that the lowering of util is just by paying it down, not opening a new account, new INQs, etc.  Based on how much CC debt you have, a btter approach to getting out of CC debt is to use a DMP program which would lower your interest rates and once finished, your would have the benefit of both a higher FICO score and getting out of debt.

As a side note, using secured assets to pay unsecured debt is never a good idea, nor is using personal credit to back a business either.

You can win the FICO score game.  The rules are simple to follow.  Also from time to time what makes sense finacially may hurt your FICO score in the short term so don't be FICO score poor.

[Anonymous]

Man I would be SO mad. My blood pressure is high enough today after I found out my Credit scores were not the GOLDEN BOY FICO scores (from the Experian site). What a rip.

[Anonymous]

A total of two loans were closed (primary mortgage and secondary mortgage) and one was opened (new primary mortgage). So my total number of accounts has decreased.

As far as changing from unsecured to secured (i.e. paying off credit cards with a home refinance) being a bad idea? It is only a bad idea if I planned on filing bankruptcy.

That is out of the question. I will not file bankruptcy. Period.

No offense to anyone who has. I will just do everything in my power to avoid it.

Plus the cards that were paid off were 14.99% - 23.99% interest rate.

New primary mortgage is 4.75% With the adjustments to minimum payments vs. mortgage payment I freed up almost $300 monthly (including my payment to my grandmother). This is now going towards the highest rate card I have until it gets paid off (10.24%). As far as anyone saying "yeah, but you extended the length of the term to 30 years with what you rolled into it". Yes I did, and 20 -30 years from now, when a cheeseburger is $20 and a Honda Civic is $75000 my mortgage payment (which will be the same then as it is today) will seem laughable.

In addition, from what I understand about FICO scoring unsecured debt hurts your credit rating FAR worse than secured debt. This also improved my debt-to-credit ratio quite a bit.

I think it was a good idea

"I" cannot "win the FICO game" alone. This is my point. FICO not only reflects what I do, but what shape the industry is in, what shape my creditors are in, etc. It is not an accurate portrayal of MY creditworthyness alone as it should be.

As far as the rules being simple. Well, I covered that in my statement concerning myFICO.com's score simulator which when I used it to simulate the result of the refinance it told me my score would wind up 760 (+60). Did it? Nope. It went down. The author of FICO scoring can't even accurately predict what the score will be.

Isn't it ironic that the people who qualify for the best loans (high FICO scores) are also the ones who don't need to borrow any money?

My goal remains to get to a point with my outstanding debt where I don't need a FICO score any more.

[Anonymous]

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@Anonymous wrote:

A total of two loans were closed (primary mortgage and secondary mortgage) and one was opened (new primary mortgage). So my total number of accounts has decreased.

As far as changing from unsecured to secured (i.e. paying off credit cards with a home refinance) being a bad idea? It is only a bad idea if I planned on filing bankruptcy.

That is out of the question. I will not file bankruptcy. Period.

No offense to anyone who has. I will just do everything in my power to avoid it.

Plus the cards that were paid off were 14.99% - 23.99% interest rate.

New primary mortgage is 4.75% With the adjustments to minimum payments vs. mortgage payment I freed up almost $300 monthly (including my payment to my grandmother). This is now going towards the highest rate card I have until it gets paid off (10.24%). As far as anyone saying "yeah, but you extended the length of the term to 30 years with what you rolled into it". Yes I did, and 20 -30 years from now, when a cheeseburger is $20 and a Honda Civic is $75000 my mortgage payment (which will be the same then as it is today) will seem laughable.

In addition, from what I understand about FICO scoring unsecured debt hurts your credit rating FAR worse than secured debt. This also improved my debt-to-credit ratio quite a bit.

I think it was a good idea

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I agree.  It is just too simplistic to say never exchange unsecured for secured debt.  Were that the case, HELOCs would be DOA.

Are there things to be concerned about?  Should one be careful and fully analyze their particular situation?  Of course.  And once you do so the logical conclusion may well just be that using secured debt to pay off unsecured debt is a wise move.  Or maybe it isn't.  Each person's situation is different.

[marty56]

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@Anonymous wrote:

I agree.  It is just too simplistic to say never exchange unsecured for secured debt.  Were that the case, HELOCs would be DOA.

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For many years in Texas, a strong homestead law prevented the seizure of your home for most debt, other than the non-payment of the mortgage and taxes.  Several years ago they started to allow HELOCs, which I was against, since it weakend the law.  It now quite possible to loose your home to the same bank that you formally had CC debt with by converting it to a HELOC.  Also the odds are not in your favour by converting CC debt to a HELOC since most people just run the CCs up again.

There is no evidence that today's economy is factored into our FICO scores other than by the actions of CCCs in doing AA to our accounts.  Even if the FICO score formula was tweaked to hit someone harder for util or lates, both those factors could be eliminated by proper credit management.