Requesting change in finance company policy

[CreditBob]

I actually had just sent off this email to out financial lawmakers in Washington DC. I have great credit and feel that just because I use a finance company does not mean I am a high risk. So I am requesting that the new law states a finance company can not have any negative impact on your fico credit score or credit rating. And these types of companies need to be treated in the same, fair way just as a bank or credit union trade line would be reported. AS long as you make your payments on time then no problems. So here is a paste & copy of the email to out lawmakers.

There are many of us consumers, like myself, that use a finance company to obtain a personal installment loan. The credit bureaus & Fair Isaac Corporation, developer of the fico credit score, has included in their score formula to make a finance company look like a negative factor as part of the credit score. It is not fair to get penalized on your credit rating all because I went to a finance company to get a loan just like I would at a bank. So what I would like have passed into legislation is this. That any finance company is to be treated ion the same way as a bank or credit union and not ding our credit all because you went to a finance company. The consumer should not be getting penalized for using these types of companies.

[guiness56]

I don't think using a finance company directly impacts your FICO score.  Creditors that see you are using one may tend to believe, because you do, you are high risk.

As long as your payments are made on time your score should not change.

[llecs]

I also believe that the CFLs ding you, albeit in a small way. Even if you PIF, there's a long-term ding for as long as it reports.

IMO, the damage is so minor that it isn't worth thinking twice about. The most annoying aspect is that it shows as a negative factor seemingly forever. However, if a couple points shy of that new mortgage, every bit helps.

While I'm an avg. Joe posting just like everyone else here, I have to come to FICO's defense on this one. The FICO score is created on input from lenders and lenders lump a CFL (e.g. CitiFinancial, Wells Fargo Financial, Beneficial back in the day, etc.) with that of a payday loan. Anybody can get a loan from the likes of a Citifinancial. When my FICO scores were in the tank, I was getting preapproval offers every month it seemed for $2500, $5000, etc. Like a payday loan, there were no requirements. Anyone can go into their local office and walk out with a check. The problem that lenders have is that it's too easy to get money. I'm not a lender, but I'm guessing that under a manual review, any payday loan or CFL would be looked at unfavorably because of the lack of lending standards and because they are so easy to get, that the borrower (in the eyes of a lender) must therefore be strapped for cash because they aren't going through a traditional lender, like a bank or CU or have money saved in the bank to avoid instant loans.

[guiness56]

I have to CFLs and my score has not changed at all.  I could be that my score is low anyway.

[Anonymous]

Why would legislators have any input on a proprietary scoring algorithm developed by a private company? Perhaps I should contact someone in DC to pass a law to make Coke change their formula.

The presence of a finance company in the credit mix has a minor effect on score, even less if there is only one FC tradeline or if the FC tradeline is not recent. DW and I both have an FC tradeline and our scores are just under 800.

The Fico scoring model quantifies risk based on factors associated with historic delinquency. In general, those with FC tradelines tend to have a higher percentage of delinquency. Similarly, those who might be missing one of more types of "positive" credit (such as an installment loan) also tend to be higher risk. These factors are based on the population as a whole. There are 21-year-old males who are perfect drivers, but in general that age group has more accidents and claims, so everyone in that age group pays higher premiums. There are no magical machines to detect the exceptional 21-year-old driver, and there are no magical machines to detect which people with a CF tradeline are safer credit risks. So instead there are statistical models.

Of course, there are people with a CF tradeline who are low-risk consumers. There are also people who don't have an auto loan or don't have a mortgage loan, who are also low-risk consumers. But, overall, the analysis underlying the scoring models indicates that the presence of a CF tradeline (or the absence of a positive credit type) slightly increases the credit risk. If it didn't, Fico wouldn't identify it as a negative factor ...

[RobertEG]

Revike hit the nail on the head!

If Fair Isaac considers CFLs to be a higher risk, it is most likely because, in the macrocasm of payment history data, they are.

Fair Isaac does not generate 200 million separtate scoring algorithms, each one tailored to just one consumer risk profile.

They generate general categories of risk repayment based on how secure the general type of loan is.

CFLs are not generally low risk loans.

It may sound illogical to some that most of the highest principal loans are scored with the lowest risks under FICO scoring.

A mortgage debt of $200,000, or an auto loan of $40,000, are big debts. But they are intallment loans that dont have the immediate threat of increase in principal owed, and are normally secured by real or personal property in case of default.  The least likely, in a risk analysis, not to be paid.

So most installment loans are not a big FICO scoring risk.

Revolving CC account carry the risk of consumer increase of balance at any time, so are scrutinized more closely in FICO scoring.

CFL loans are a different breed.  If you dont pay the CFL,. what risk do you have?

Congress never has,and probably never will,  be in any position to regulate credit scoring.  Credit scoring is conducted as a Congressionally protetected intellectual  property right,  trade secret, under 35 USC 100, et seq.    How they score a CFL loan is something that Congress may have the authority to attempt to regulate, but it opens a pandora's box of governmental intervention into the trade secret rights of private companies. 

Credit scoring is not Congressionally regulated,. and is extremely unlikely to even see the introduction of restrictive legislation, let alone clearance of any Congressional commttee, and thus passage for any Congressional vote.  It would involve, as Revike has said, a prior revision of our entire statutory intellectual property law.

[kbns625]

The number 4 factor on why my score is not higher is "You have a Consumer Finance Account on Your Report"...It goes on to state:

Number of consumer finance accounts on your credit report
5 accounts

Now I do have an old Citifinancial Account, but I can't figure out the other 4 they are talking about?!  My score is only 660 and this is listed as a the #4 "top factor" that is obviously hurting my score.  I suspect my old (Paid, never late and Closed since 2002) Student Loan accounts are being coded as CFA's.  Even if it is only 2-3 points for each of these  - those dings help keep me under the 680 I need to apply for HELOC.  But are they helping more than they are hurting?  Who knows, since they are also coded as "too new to rate"....  What a mess....

[RobertEG]

Congress has no authority to regulate credit scoring.

Credit scoring is just one company's view of your risk.  Congress is to tell them how to view their opinion?  And how they reached it? Hmmm....

Credit scoring is a business trade secret that is an intellectual property right that anyone can hold, without any public disclosure, should they choose to do so.

Trade secrets are regulated by Article 6 of the Constitution, and currently coded under 35 USC 100, et seq.  If the holder of the trade secret does not choose to apply for patent protection, and thus give up the8ir their trade secret in excange of limited patent right, it would require a total overhaul of the entire intellectual property stattues set forth in 35 USC 100 et seq, which can go back to the first patent act of 1789.

It wont happen.