@Anonymous wrote:
I mean, pretend you're the underwriter that's considering extending credit to these two people. Even with identical profiles and income levels, are you more concerned about the guy with $485 in revolving debt or the guy with $25k in revolving debt, even if they both have the same score? I think most would be more cautious of the person with 50x more debt, so IMO that should be somehow reflected in their score, at least a little anyway.
I definitely see where you're coming from but the thing to note isn't just that a person with a high balance is a bigger risk in adverse events, but there's also a reason for extending credit: profit.
There's a lot of information we are NOT aware of with each bank -- for example, banks can and do perform regular SPs and those SPs do offer banks some insight into a person's history over time. Just because FICO is only a snapshot of today's balances doesn't mean that your creditors aren't monitoring your spending and payoffs over time in their own internal database. So if you have someone with a $485 balance today but they tend to always have low balances versus a guy who has been carrying a variety of balances but also showing payments -- the underwriting's internal analysis software may say "this person is somewhat higher risk of default during an adverse life event, but they're also paying interest and we want a piece of that so let's extend them more credit."
The CO rates of each bank vary widely (and wildly) but the banks also have internal indicators for what an individual's profitability might be based on their spending. The banks need to make money either through merchant processing fees or interest charged (or annual fees, etc) and extending someone who carries a balance but FICO08 shows a tendency to always make payments means that person can be a significant profit point for the bank.
If the typical interest rate is around 1.7% a month and the bank's CO rate is under 5% annually per accounts held and the accounts that get CO'd tend to have the highest balances for the longest times, I would figure that the bank is overall making a profit on the riskiest individuals who will do anything to avoid a late payment event. The bank's interest isn't in zero risk individuals or in maximum risk individuals but in individuals who are just shy of CO/default.
There are some folks on various credit forums that I know carry 25-30% utilization on very high limits every month and I know are probably paying more than an average tradeline size in interest annually across all cards and will do whatever it takes to avoid default. When I read their posts asking about cash advances or balance transfer rituals, I know the bank is profiting and that person is also part of why I can earn my cash back each month at no cost, but the bank LOVES those types and it wouldn't surprise me if their internal analysis software knows what the tipping point will be for overextending credit.
