Understanding FICO® Scoring

[TheNewWorldMan]

I think there are several reasons why FICO doesn't include income...most practical, some political.

First, tracking and verifying income would make keeping credit reports orders of magnitude more difficult (read: expensive).

Second, income isn't always a reliable measure of creditworthiness...granted that all other things being equal it's easier to pay your bills if you're rich than if you're poor, but all other things are often not equal.

Third, enough people already believe FICO favors the rich, and I have a feeling Fair-Isaac is rather reluctant to "make it official" and factor in income. (My personal opinion on this is FICO does favor the rich, at least somewhat...but then again, this being America, what doesn't?)

But one must consider FICO is not intended to be the end-all and be-all of a person's financial fitness. It simply measures how well a person has kept up with their past financial obligations. Of course anyone loaning out a significant amount of money is going to want to know income as well, but that's beyond the purview of FICO scoring.

[Noah_Bodie]

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bobkelly wrote:

Can anyone explain why one's income has no bearing on a FICO score?  Seems to me that this plays a big part in creditworthiness, yet FICO doesn't use income (or net worth) as part of their formula in creating a FICO score.

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FICO score is a credit risk score. Having money in your pocket, or the bank, doesn't prove one will repay one's debts. I daresay there are a number of con artists with a high net worth, but I wouldn't invest money with them whether it's following their financial sheets or following the Queen.

[monro411]

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ilovepizza wrote:

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atlantaman wrote:

ask any rapper?

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Professionals in the rap music industry. Millions in income, terrible credit, bankruptcies, but lots and lots of income. lol.

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That is stereotyping.  It gets magnified to the media when it happens.  But most millionaire rappers are good money managers or have good accountants.  But like many of us, some rappers dont have credit knowledge till someone explains it to them.  So all at once you have all of this money.  Your first instinct is to spend on ever dreamed of.  Then your next album does terrible.  You have spent all of youor savings and now you are up to your armpits in debt.  You owe on your $200,000 on you AMX BLack and you income from your album is 15,000.  BK is your best option.  I know this from my brother who works in the music industry with several famous musicians(not just rappers). 

[acadia11]

Well, considering 50 cents the #1 rapper in 2006 in terms of sales, and also the #1 rapper in terms of revenue is almost worth 3/4 of a billion dollars because he sold his likeness to Glauceau as opposed to taking upfront fee. What did that earn him you ask? He traded advertisement to become a minor owner at 10% of the company, Glaceau, and just picked up more than $400 million when the company was sold to Coca Cola. Glaceau is the maker of Vitamin Water and was sold to Coca Cola for nearly $5 billion. So, I guess you can ask him about money management, or maybe you can ask, Jay-z or Puffy aka Sean Combs aka P. Diddy, also among the top richest people all under the age of 40. Or maybe Master P. , what do all these guys have in common, well 2 of 4 a college education, MBA's, and convincing people that they got "street cred", and people like you falling for it. Not to mention all being among the wealthiest people in America, and how was that money earned, not rapping, but through shrewed business dealings. Just because a kid has a hard life and sees an avenue to take rapping as a ways out, doesn't mean, he's financial irresponsible or ignorant, alot of those same kids, just were born in different circumstances and given the opportunity will and do succeed, and alot of them are smarter than you or I. The point, being a rapper has nothing to do with financial irresponsibility, except if your name is MC Hammer. But take a page from Warren Buffet and I paraphase, "I am not special, I was just born with the right circumstances with the right family and guidance, sheer luck. And it so happens I have a skill that makes money in our society, now drop me in the middle of a jungle and I tell you this skill would be of no use."

[ragcajun]

Good point.  50 cent made over a 100 million last year with the Vit water deal. 

[Noah_Bodie]

Even the financial experts don't quite "get" what FICO scores are and are not.

http://ficoforums.myfico.com/fico/board/message?board.id=creditnews&thread.id=354

[Noah_Bodie]

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RobertEG wrote:

I think it is being a bit naive to state that income has no relationshop to ability tp pay debt... it certanly does.  Paying requires both abiliity and willingness.

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A FICO score doesn't factor in income because income has nothing to do with one's ability to repay debt. Ability to repay a given debt is a risk assessment done by a lender when they look at downpayment, income, assets, time in job, etc.

A FICO score seeks to divine whether any individual is a default risk for any loan or extension of credit based on past performance.

Willingness really isn't the issue either. Most people are willing to repay their debts and there's only a tiny minority out there who actively schemes to default. But they've found it easier and safer to engage in ID theft.

[masdeocho]

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RobertEG wrote:

I think it is being a bit naive to state that income has no relationshop to ability tp pay debt... it certanly does.  Paying requires both abiliity and willingness. I think a primary reason why income is not included in FICO scores is due more to the fact that income data is something that they simply do not have the ability to collect and update regularly.  Just try to secure a home loan without disclosure of income, and you will realize that it does count.  FICO is thus not an overall measure of try credit worthiness, but more simply a historical snapshot of how you have paid debt in the fairly recent past.

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I made a career change and took a 75% cut in pay.  I still pay my bills on time and keep util low.  My FICO scores didn't drop; why should they?

[smlala]

My friend who makes over a 100K a year is a complete "financial moron" who lives check to check, rarely paid his bills on time, and has maxed out every single one of his 11 credit cards.  He's a smart guy, great at his job, has an excellent earning potential, and couldn't get a new credit card or personal loan a few months ago when faced with a desperate financial situation for just a few thousand dollars because his credit score is so bad. 

Should his income be factored into his score?

IMO, nope.  He'd just get a few more credit cards and max those out too, and then not pay them on time.  Just because you're smart and/or make alot of money doesn't mean you're smart ABOUT money.

And, why pick on rappers?  We can pick on atheletes just the same... 

[bobkelly]

How can one say logically claim income has nothing to do with one's ability to pay back debt?  If your annual income is say $250,000, than a $2500 loan is really a trivial amount, just 1% of your income or put another way, just 2-3 days pay. 

However if a lender makes that same $2500 loan to someone who makes $25,000, that loan is 10% of his income, or roughly a whole month's pay, who really has a better ability to pay? 

The higher earning income individual has more disposible income, therefore more of an ability to repay the $2500 loan in this example.  Therefore, the lender is taking on a bigger risk with the lower income person. 

Message Edited by bobkelly on 09-10-2007 10:17 PM