flawed FICO scoring system

[SouthJamaica]

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@CreditMagic7 wrote:

What might be considered by consumers flawed is perceived by the industry as good practice.

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It may well be 'good practice' within the lending industry to prefer consumers who have some current debt to those who have none. But I don't think it's based on assessment of risk, it's based on assessment of potential reward.

People who avoid borrowing, and people who have borrowed but no longer owe anything, are less likely to be profitable.

I think that is the real reason owing a little is a plus, and being paid off is a negative, in FICO scoring, but you'll never hear Fair Isaac admit that publicly.

The whole FICO scoring system, which is really just a part of the banking system, is based on encouraging people to owe money to banks.

[Anonymous]

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@SouthJamaica wrote:

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All other things being equal, having current debt is not a sign of greater creditworthiness than not having current debt.

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And again, this is incorrect as not showing the ability to manage debt shouldn't (and doesn't) win one any points with FICO.

[SouthJamaica]

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@Anonymous wrote:

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@SouthJamaica wrote:

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All other things being equal, having current debt is not a sign of greater creditworthiness than not having current debt.

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And again, this is incorrect as not showing the ability to manage debt shouldn't (and doesn't) win one any points with FICO.

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I never said that the mere fact that one is debt free makes one more credit worthy than someone who has a debt so please stop twisting my words.

The term "all other things being equal" means that all other things are equal.

E.g., if A and B are both 50 years old, each have paid off 3 mortgages and 5 auto loans in identical exemplary fashion, each have had 15 credit card accounts and managed them in identical exemplary fashion, each have an average age of accounts at 10 years, and the oldest account at 25 years, each has income of $200,000, and the only difference between them is that A's credit accounts report at zero and A has no new installment loans, while B has taken out a 9th installment loan, which he has partly paid down, and has a balance on one of his cards, it is beyond absurd to argue that B is 30 or more points more creditworthy than A.

[Anonymous]

Oh I get exactly what you're saying, and for the 4th or 5th time I disagree with your POV.  Without any current ability to show that A can pay off his debts we can't simply assume that he can/will based on the past.  I've cited multiple examples earlier in this thread as to why someone suddenly may not be able to.  B however is currently showing the ability to manage his accounts in exemplary fashion, thus proving that today, at this exact moment in time he's capable and willing to pay as agreed his score will reflect that.  All FICO scoring regardless of category gives more weight to the most recent data over old data.  B's data is more current than A's in your example.

And again, "30 points" means absolutely nothing, ZERO, with respect to creditworthiness when the two individuals in your example have 800+ scores.  Both can obtain anything they want in life with respect to credit.

[iv]

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@SouthJamaica wrote:

All other things being equal, having current debt is not a sign of greater creditworthiness than not having current debt.

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Having current debt? No. Paying current debt....? Yes.

In the spirit of "all other things being equal", consider three otherwise identical people, with otherwise identical files:

One with a currently-open loan, being paid on time.

One with no open loans.

One with a currently-open loan, being paid late.

Notice that is effectively:

Postive credit feedback.

Neutral/unknown credit feedback.

Negative credit feedback.

And thus (with otherwise identical history), both credit scoring and common sense rank those three people into an ordered list.

And yes, of course scoring/risk management is all about profit.... that's the point.

It's not some dark, hidden secret - the whole point of risk-based pricing in lending, insurance, etc... is to set rates that result in certain profit levels (factoring in losses due to delinquencies as well as lost business due to competitors with better rates).

[CreditMagic7]

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@iv wrote:

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And yes, of course scoring/risk management is all about profit.... that's the point.

It's not some dark, hidden secret - the whole point of risk-based pricing in lending, insurance, etc... is to set rates that result in certain profit levels (factoring in losses due to delinquencies as well as lost business due to competitors with better rates).

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^This

Pretty much sums things up however there are practices on the credit consumers end (chiefly us) that we can use to maximize some advantages in spite of the seemingly overwhelming odds.

[Anonymous]

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@iv wrote:

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Having current debt? No. Paying current debt....? Yes.

In the spirit of "all other things being equal", consider three otherwise identical people, with otherwise identical files:

One with a currently-open loan, being paid on time.

One with no open loans.

One with a currently-open loan, being paid late.

Notice that is effectively:

Postive credit feedback.

Neutral/unknown credit feedback.

Negative credit feedback.

And thus (with otherwise identical history), both credit scoring and common sense rank those three people into an ordered list.

And yes, of course scoring/risk management is all about profit.... that's the point.

It's not some dark, hidden secret - the whole point of risk-based pricing in lending, insurance, etc... is to set rates that result in certain profit levels (factoring in losses due to delinquencies as well as lost business due to competitors with better rates).

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Good post and right on point.

[Anonymous]

As Spock would say. That is no logical. A high FICO score encourages spending and combined with low interest rates most new car owners on the roads are in debt for 72 months.As Spock would say again. That is  not logical. 

[Anonymous]

I disagree that "a high FICO score encourages spending."  My scores have been over 800 at times and barely over 600 at other times; I wasn't more encouraged to spend when my score was higher.

Again to rehash a point that's already been made a few pages back, there are different ways to look at "debt."  Many people that use credit simply do so to build their profile and score as an investment in their future in a way for a time they may actually need it such as a big mortgage.  People that use credit cards but PIF every month that never pay a penny of interest are essentially using their "credit" the same way they'd use a debit card.  There are people that could buy cars with cash but still use auto loans.  I'm one of those people and more than once in my life about half way into the loan term I've just paid it off as to not be bothered anymore.  Using the system allows one to build their profile (and scores) and rightfully so over someone that doesn't use it.  If people live by the rule of not buying anything they can't afford, from my perspective they don't have "real" debt.  That's just how I see it.

[Thomas_Thumb]

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@Anonymous wrote:

I disagree that "a high FICO score encourages spending."  My scores have been over 800 at times and barely over 600 at other times; I wasn't more encouraged to spend when my score was higher.

Again to rehash a point that's already been made a few pages back, there are different ways to look at "debt."  Many people that use credit simply do so to build their profile and score as an investment in their future in a way for a time they may actually need it such as a big mortgage.  People that use credit cards but PIF every month that never pay a penny of interest are essentially using their "credit" the same way they'd use a debit card.  There are people that could buy cars with cash but still use auto loans.  I'm one of those people and more than once in my life about half way into the loan term I've just paid it off as to not be bothered anymore.  Using the system allows one to build their profile (and scores) and rightfully so over someone that doesn't use it.  If people live by the rule of not buying anything they can't afford, from my perspective they don't have "real" debt.  That's just how I see it.

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Agreed.

You don't need to spend a lot to get a top Fico score. You need to have credit and manage the credit you have responsibly. Common sense applies.

Credit scores are response (output) variables they are NOT input variables.No connection with high spend and high Fico scores.