Understanding FICO® Scoring

[masdeocho]

The FICO score does not measure your ABILITY to repay.  It measures the PROBABILITY you will repay, based entirely on your past behavior.

[hdj]

Income doesn't need to be a factor in the FICO score. It is a separate factor in the process of a loan application that is used to calculate ability to pay back the loan based on debt to income ratio.

[haulingthescoreup]

FICO isn't giving you credit; the lender is. Credit scores are one of the things that a lender looks at, along with you pay stubs, and I don't know these days--tax returns? (been a while since I've done any major borrowing like a mortgage.) FICO is just one of the sources of information that the person with the moolah is looking at.

And even high income doesn't necessarily mean increased ability to pay. Lots of people with big-bucks incomes have let themselves be suckered into big-bucks lifestyles. My DH believes 24/7 that the wolf is at our door, but in fact, the wolf is busy sniffing and drooling around on the porch of the folks down the way with the brand-new (leased) Lexuses, the brand-new (financed) plasma screens, etc etc. Meanwhile, there's the African-American lady in Mississippi who took in laundry for years, dollar a basket, never had a car, pushed her shopping cart back and forth to the grocery store, and left $150,000 to fund a college scholarship.

http://www.usm.edu/pr/oola1.htm

And I'll bet she didn't even have a credit score, period. Sure it's nice to have extra money; that's why I work two jobs these days. What counts is how well you have managed it in the past, so the lenders know if they want to fork over some $$$ in the future.

[Joe77]

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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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What it really boils down to is there is simply nowhere in the FICO scoring matrix to keep track of income, and there wouldn't be an accurate way to continuously report it anyway.

This is why lenders look at FICO and Income as two parts of a loan app.

[Noah_Bodie]

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bobkelly wrote:

The higher earning income individual has more disposible income, therefore more of an ability to repay the $2500 loan in this example.

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This statement is correct and encapsulates the fallacy in your thinking, Bob.

FICO scoring is blind to income/assets AND the loan product itself. You're making a leap by including the specific loan product in your example to prove your assertion that income counts. If a lender is dumb enough to look at FICO scoring alone, and hand over a mortgage on a $3 million home to someone with an income of $55K a year and $0 down, then the lender gets what they deserve when the loan goes into default.

Person A has a 720 FICO score and an income of $50K a year. Person B has a 720 FICO score and an income of $150K a year. All else being equal, a prudent lender would give Person A a home loan for $X and give Person B a home loan for $3X.

A scoring algorithm determines whether a person is likely to repay ANY debt regardless of income, assets or the loan itself.

A lender looks at a score to determine risk. It's bean counting. Higher risk, higher premiums. If you're a smoker, you pay more for life insurance. A smoker with a $300K life insurance policy might pay the same premiums as a preferred insured with $600K life insurance.

Same thing applies to a mortgage or any loan. Higher credit risk pays higher interest.

It's also the lender's job to look at income, assets, employment history, DTI, et al. and decide how much loan they should give one.

You seem to be the only one who don't get this--or perhaps Mom shoulda put you to bed earlier as you have soccer practice in the morning.

[TheNewWorldMan]

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Noah_Bodie wrote:

You seem to be the only one who don't get this--or perhaps Mom shoulda put you to bed earlier as you have soccer practice in the morning.

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Let's not get personal here.

[bobkelly]

Thanks everybody.  Your comments help put a FICO score into the right perspective.  It is just one piece of information a responsible lender takes into consideration.  Additional  factors such as income and DTI ratios are equally important, they just are not part of a FICO score.

[Noah_Bodie]

Now all we have to do is educate the supposedly educated and 'splain it to lenders who issued loans based on FICOs alone.

I cannot help but chuckle at the similarity of the two statements below.

"How can I be overdrawn? I still have checks."

"How can the loan be in default? We pulled the guys credit?"

[TheNewWorldMan]

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Noah_Bodie wrote:

Now all we have to do is educate the supposedly educated and 'splain it to lenders who issued loans based on FICOs alone.

I cannot help but chuckle at the similarity of the two statements below.

"How can I be overdrawn? I still have checks."

"How can the loan be in default? We pulled the guys credit?"

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As Robert Heinlein once quipped, "Intelligence reports are useful only to the intelligent."

Let's face it, most of these lenders knew they were pushing paper of highly questionable quality. Pulling a FICO was merely a formality, dressing up the naked truth in a fig leaf. As long as they got their commission checks, who cares, right? One hand washed the other.

At least until the bills came due...

[kamil]

I'm going to use fake numbers for my example, but they are realistic numbers.

I make $40,000 per year in my current job.(The average income in the area where I work is about $16,000) --so I do very well... If I take a job 30 minutes away doing the EXACT same thing... I will make $65,000.  Why should I have a lower FICO score because I choose to not to:

1.  Travel 1 hr extra each day

2.  Put up with extra stupidity at the other company

3.  Have less time with family, etc..

But living where I do allows me to pay $400 rent instead of $1200

How would they take regional differences into effect????.

Message Edited by kamil on 09-25-2007 06:28 AM