@supervelous wrote:Gunnar, is it profit? I always assumed it was to judge how big of a risk you are to the bank, so they could accept/decline you as a customer and price you according to risk. How am I more or less profitable than last month now that I've paid off my student loans?
If your argument is I have more disposable income to pay a higher price of credit, this contradicts many other aspects of how financial institutions price loans. Usually the most financially strong customers get the best rates, due to their low risk to the bank as well as competitive factors. The customers with the best scores tend to have more disposable income and less debt.
I have now decreased my debt, increased my disposable income, and now I am likely to get higher pricing from these banks. Like I said these attributes are common to the higher FICO individuals and the reverse is often true at the other end of the spectrum, low DI and more debt. Yes I guess they'd profit more from me at a higher rate, but by that logic the most financially sound individuals would pay higher prices because they can afford to and the worst-off would pay lower because well they can't afford higher pricing. But we know the adverse is true in credit scoring.
It just seems to be a flaw in scoring, where they are ignoring either 1. Closed accounts in mix of credit and/or 2. AAoA on closed/paid accounts. Both of which are flawed in calculating RISK to the lender, which I still think is the purpose of FICO scoring to the business. Profit too, but only in that it allows them to assess risk to know how much credit to grant and the pricing of that credit pursuant to the risk involved in granting credit.
You almost hit the nail on the head. Just keep in mind that FICO scores measure your debt management habit, or in other words, your willingness to pay, not your ability to pay.
@Gunnar419 wrote:
@HiLine wrote:
@Gunnar419 wrote:supervelous, of course ultimately it's about what's profitable or not profitable for the banks. Getting to profitability it's also definitely about how risky or how reliable you are. The attempts to measure risk and reliability are just means to the end, though.
I sure wish I could answer your question, but I can't and I've never heard anybody give a good answer.
Probably because you dismissed good answers.
Oh yeah. Being insulting is really helpful.
And of course just absolutely everybody on the boards is expected to remember an answer you posted five or six months ago. How remiss of me to have forgotten it.
But guess what? I just re-read your thread from back then and I still don't think it's an adequate answer.
You misread my post, or maybe I misread yours. The question was whether FICO scores measure reliability or profitability, not about whether it makes sense that paying off installment loans reduces your FICO scores.
