@crunching_numbers wrote:
I really am trying to figure the logic out.
The buckets seem to just be unfair, holding different people to completely different standards to obtain the same score.
Your income is not even considered, so someone who owes say $5000 and makes $20K per year, is treated the same in the calculations as someone who makes $200K and just hasn't paid that month expenses off. It seems like they would not really be the same credit risk.
A person who is in their 40's and has a large number of assets but has been paying cash alot and is responsible with their money, is considered a high risk for no history, and placed in the same category with a 19 year old with no history because they are young.
It just seems like alot of the issues we see where people are denied or treated unfairly happen because our system has taken the human out of decision making process.
IMHO, of course.
I saw this post over the weekend, IIRC. Since it got bumped, I'll throw my 2 cents...
IMO, the buckets are a good system. A person with a short history isn't direcly compared to a person with a super lengthy history. Or a person with baddies isn't directly compared to someone with a pristine history. FICO created a dozen or so buckets (depending on the FICO version) and it is a mechanism by which you are fairly compared with others who have a similar credit profile.
It is also a stop-gap of sorts. Remember in college you had that one professor who graded on a scale? FICO is just like that. If everyone in your class does poorly, and let's say the best grade is a C, then that person with a C become the new A-student, with everyone else's grade weighted behind that student. In FICO-speak, if the economy tanks and everyone does poorly in terms of credit history, then everyone's score is basically weighted where the impact of a new baddie isn't as strong as if we were in an economy where everyone did well. Make sense? In short, baddies don't hurt as bad is everyone has a bad credit history. Your score is dependent on everyone else's score.
I'm thankful income isn't considered into FICO. It would be a reporting nightmare for most employers out there and frankly, I don't want any future employer, collection agency, existing creditor, to see what is reported in the way of income.
It also creates abuse. I'm a business owner. What would stop me from reporting $1,000,000 in income? Nothing. It'll also create abuse for those looking for jobs. If I pulled an applicant's credit file, I know what they made. Every employer wants to keep liabilities as low as possible, including payroll, and having that info would create a mechanism by which to pay as less as possible. Basically, I would know what they are worth based on their reported income.
Reporting of income, and using it in FICO scoring, might also break the law. The Equal Credit Opportunity Act prohibits creditors from discriminating based on income source, like PT work or alimony. They can ask about length of employment and so on, but they cannot discriminate due to the source itself. If you have a credit profile with income reported, and the creditor sees that source, which does not have to be revealed, then there is the risk for abuse based on deciding credit approval using that source. Finally, what if you had no income, like a housewife (or househusband)? It would be discriminatory to include that $0 income into FICO scoring. Someone who stays at home with the kiddos might have a lower score if income were considered and that's wrong.
Reporting income would also be a logistical nightmare. It's ripe for abuse but also there is no way to address variable income. I know some folks in sales who earn $30k-$40k in a month, but in the following month, they earn $0. It's preformance-based pay. How would an employer report that? At tthe highs of income? Lows? You can't average it because jobs come and go and you'd need a long period of time to create an average. It'll also be a nightmare for those self-employed. I know of some self-employed folks earning $2-3 million each year. But their expenses come close to topping that and they keep the small difference as net income. Last year my net income for one business was $8000, but the actual income was over $50k. What level would be reported and who would report that? It would make a differennce if reported and factored into FICO.
With respect to income levels in relation to debt, someone who has a $5000 debt (to use your good example) and earns $20,000/year is on the same level as someone with the same $5000 debt earning $200,000/yr. If that $5000 came over the course of a year to make math simple, the person earning $20,000/yr spent $25,000 in the past year. The person earning $200,000 spent $205,000 last year putting him/her into debt. Both persons are equally broke. One spent more than the other, but both are equally broke. It happens that the $200k earner his a higher expense level than the one earning $20k (e.g. bigger house, nicer car, more expenses, etc.). They're just broke at a higher level.
Finally assets shouldn't enter into it. It should enter into the credit decision process as far as having reserves to pay a debt, but it shouldn't be a part of FICO scoring. Assets rise and lower in value. If stocks or other investments were considered, those rise and fall all the time. Take Blackberrys for example. Everyone wanted one. We all joked about Blackberry thumbs. This time last year, if I took $6,350, I could buy 100 shares of RIM for my investment towards the company. Today, a year later, that $6,350 investment is worth $1,315 as of today's close. I would have lost $5000. That asset is no longer worth $6350. In terms of reporting, how could that be reported? At the high? At the low? And would my FICO score take a hit if assets were included? And who knows, maybe it'll rebound (not likely). Same applies to other assets like a house. Four years ago, houses in my neighborhood were selling at an average of $750k+. Now, the average is just above $500k. One day, the homes will rebound back to $750k. It's a cycle, but FICO shouldn't factor that in. It would be unfair when things go bad.
I typed way toooo much. But I will agree with your last comment. The human is nearly completely out of the decision-making process. In terms of credit, I have have no qualms paying an extra 2%-3% in APR on a CC or loan just to pay for the opportunity of a human to review my credit, vs. a computer running the numbers, especially off FICO alone.
