What FICO Doesn't See That Can Mean A Whole Lot More Than Your Other Information

[Anonymous]

Average salary (low 60's), single parent.  Pays child support of $1100 per month, never late on that or any other bills for 15 years. 

Own home free and clear. 

Discretionary* income while paying support is only 200-400 per month, budget is tight, drive an old car and skip vacation every other year.

Credit utlilzation is higher than recommended (<10%) owing to being in a tough spot once in a while (boiler goes, dentist, etc.).

Picture changes dramatically as child support ends.  Discretionary income is now 1300-1500 per month.   Easily able to afford 1-2 vacations per year, a new car payment and double savings rate to 30% of gross every month.  To the credit agency however there is no change in financial circumstances or ability to pay....

*Definition of discretionary income as used here:  Reminaing money after all bills are paid and 15% of gross salary is saved on a monthly basis.   

I'd imagine there are plenty of other scenarios like this.  You may have a borrower with a net worth of 2 million dollars but lives paycheck to paycheck and has a high credit utilization rate.  I knew this guy who lived in a very modest home who put very little into the upkeep yet when he died the kids got 1.6 million from an art collection that he had amassed over 50 years.   He wasn't always timely paying bills (but never defaulted) and a credit agency might consider him a risk even though his art was worth more than 200 times his open credit lines.  

Naturally there is a lot of stuff they can't keep track of and that makes sense, I just find it ironic sometimes.

[crunching_numbers]

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@Anonymous wrote:

Average salary (low 60's), single parent.  Pays child support of $1100 per month, never late on that or any other bills for 15 years. 

Own home free and clear. 

Discretionary* income while paying support is only 200-400 per month, budget is tight, drive an old car and skip vacation every other year.

Credit utlilzation is higher than recommended (<10%) owing to being in a tough spot once in a while (boiler goes, dentist, etc.).

Picture changes dramatically as child support ends.  Discretionary income is now 1300-1500 per month.   Easily able to afford 1-2 vacations per year, a new car payment and double savings rate to 30% of gross every month.  To the credit agency however there is no change in financial circumstances or ability to pay....

*Definition of discretionary income as used here:  Reminaing money after all bills are paid and 15% of gross salary is saved on a monthly basis.   

I'd imagine there are plenty of other scenarios like this.  You may have a borrower with a net worth of 2 million dollars but lives paycheck to paycheck and has a high credit utilization rate.  I knew this guy who lived in a very modest home who put very little into the upkeep yet when he died the kids got 1.6 million from an art collection that he had amassed over 50 years.   He wasn't always timely paying bills (but never defaulted) and a credit agency might consider him a risk even though his art was worth more than 200 times his open credit lines.  

Naturally there is a lot of stuff they can't keep track of and that makes sense, I just find it ironic sometimes.

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It comes down to what FICO is, and what FICO isn't.

FICO is just a risk assessment based on statistical models.  It looks at the percentage of people with a "similar" history that default or do not otherwise meet their financial obligations, and calculates the odds that you also will not pay.  It was designed as a gauge of your credit worthiness, and as a way to speed up credit application processing.

FICO is not a complete assessment of your financial health.  It does not consider your income or assets.  It does not factor in life situations or changes.  It has no idea that you have a pension or trust fund. This is what credit analysts and underwriters do.  FICO is not always right. If there is a 15% chance that someone "like" you will not meet your obligations, that means there is an 85% chance that you are not one of those people.

The credit industry, and and many of us get hung up on our "numbers and scores".  They do not tell the whole story, but, they were never intended to. That is why we call for recon when the computer decides the answer is no- to bring the human analyst back into the equation. 

edit=typos

[cashnocredit]

Yep.

And FICO scores can only use some of what's in a credit report.

Most credit analysts only use credit reports and the applicant's other stated info. Even mortgages only use FICO scores for rates though they will dig much deeper and check tax returns, assets, trusts, income source verification, etc. But that's only to approve or decline an app. FICO determines the interest rate. The reason these other factors don't play into interest rates is that the mortgages are typically insured by FHA or some other semi govt. entity and all they track are FICO scores. When mortgages are aggregated and securitized FICOs determine the coupon for the various tranches.