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@Anonymous wrote:Good points, CnC.
I do not myself know for sure that CCCs do indeed make more money off of revolvers than transactors. I know it seems obvious that Rs must be much more profitable than Ts. Of course! Because R's are paying interest. But Rs are also more costly in other ways, notably in the way they are more likely to default. And T's may be generating much more monthly (as a group) in swipe fees, whereas an R generates some initially but quickly gets to a place where the CL is stopping him from spending much more.
But let's suppose that even after we take all that into account, revolvers are still substantially more profitable for a CCC than a transactor. All that means is that FICO would need to sell a CC enhanced version of their score to CCCs, something that alows them to judge the likelihood of default and also the likelihood that the CCC will show a profit on the potential customer. As you say it might be a standard 300-850 number plus something else. And indeed FICO does already create specialized products for CCCs -- as well as lender for auto loans, home loans, etc.
And it is worth remembering that there ARE these other groups of lenders. A credit card company is not the only group interested in a person's use of credit cards. An auto lender or home lender is almost exclusively worried about the probability of default. Unlike CCCs, they don't benefit even slightly from their customers carrying a balance on their credit cards. Rather, when their customers run up large balances they carry from month to month, it does nothing but put the home or auto loan at serious risk.
So I don't see any reason why FICO and Vantage won't continue to move forward with exploring adding the R vs.T pattern in their future models. Personally I'd love to see them do that -- it will make scoring more rational and less susceptible to the utilization gamesmanship that past and current score-savvy users engage in.
You are right that a more predictive score incorporating the transactor/revolver dichotomy would be of increased value to auto and home lenders or really any installment type loan. It's the CC issuers that would need the additional flag indicating whether the risk score was for a revolver. With that flag the score would also benefit CC issuers.
As for gaming credit scores, I believe this was largely why credit scores were not available to consumers. One can't expect a score to be as predictive once the consumer base it is developed on understands how the sausage is made. The current line is that any effect from increased consumer knowldege and resultant behavior modification is negligible. I have my doubts but have seen no scholarly articles addressing this.This has been discussed a bit in regard to authorized user card abuse which clearly does occur. And here's where the regulators came in and both FICO and VantageScore reversed themselves after initially making changes to remove AU from scores. This was largely to deal with credit access amongst couples with a single income earner so the policy decision overroad getting rid of the AU effect.
@cashnocredit wrote:
As for gaming credit scores, I believe this was largely why credit scores were not available to consumers. One can't expect a score to be as predictive once the consumer base it is developed on understands how the sausage is made. The current line is that any effect from increased consumer knowldege and resultant behavior modification is negligible. I have my doubts but have seen no scholarly articles addressing this.This has been discussed a bit in regard to authorized user card abuse which clearly does occur. And here's where the regulators came in and both FICO and VantageScore reversed themselves after initially making changes to remove AU from scores. This was largely to deal with credit access amongst couples with a single income earner so the policy decision overroad getting rid of the AU effect.
You're right of course. But I think the U-gamemanship issue is deeper than just the effect of people knowing the details of the man behind the curtain. (Pay no attention to that man!) Here is how I described it earlier:
My feeling is that the lopsided emphasis that FICO has placed up till now on CC utilization is precisely because the CRAs (in the past) gave them no way to tell exactly what a big CC balance meant. To make it simple, let's suppose we are talking about Bob who has one credit card and that card has a $5,000 limit. Now suppose Bob shows a $3000 balance. Is that because Bob has gotten himself into $3000 of debt, and for the last 7 months he's only been making monthly payments of $100 on it? Or does it mean Bob tends to spend between $2000 and $3500 a month and he always pays the amount in full? In the latter case he poses far less risk. The $3000 balance isn't really "debt" in that case -- it's more realistic to see it as a track of his spending.
As a result of the current and past models, however, FICO savvy users got into highly artficial payment patterns in order to game the model. For example, they end up securing astronomically high credit limits -- amounts probably 20 times what they really want, so that they can still have ultralow utilization ratios and still spend like they actually want to. Or they end up making sure they pay their balances down to zero before the billing cycle ends. Etc.
So my perspective is that it's not just people knowing the details of the model, but the fact that the model itself was bad. It was the best model given the limited data that the CRAs provided -- but it was still far from ideal. The truth is that FICO only rewarded a guy for having a 2% utililzation because they couldn't answer the real question they wanted to ask: namely is this guy getting over his head into serious credit card debt?
@Anonymous wrote:
@cashnocredit wrote:
As for gaming credit scores, I believe this was largely why credit scores were not available to consumers. One can't expect a score to be as predictive once the consumer base it is developed on understands how the sausage is made. The current line is that any effect from increased consumer knowldege and resultant behavior modification is negligible. I have my doubts but have seen no scholarly articles addressing this.This has been discussed a bit in regard to authorized user card abuse which clearly does occur. And here's where the regulators came in and both FICO and VantageScore reversed themselves after initially making changes to remove AU from scores. This was largely to deal with credit access amongst couples with a single income earner so the policy decision overroad getting rid of the AU effect.
You're right of course. But I think the U-gamemanship issue is deeper than just the effect of people knowing the details of the man behind the curtain. (Pay no attention to that man!) Here is how I described it earlier:
My feeling is that the lopsided emphasis that FICO has placed up till now on CC utilization is precisely because the CRAs (in the past) gave them no way to tell exactly what a big CC balance meant. To make it simple, let's suppose we are talking about Bob who has one credit card and that card has a $5,000 limit. Now suppose Bob shows a $3000 balance. Is that because Bob has gotten himself into $3000 of debt, and for the last 7 months he's only been making monthly payments of $100 on it? Or does it mean Bob tends to spend between $2000 and $3500 a month and he always pays the amount in full? In the latter case he poses far less risk. The $3000 balance isn't really "debt" in that case -- it's more realistic to see it as a track of his spending.
As a result of the current and past models, however, FICO savvy users got into highly artficial payment patterns in order to game the model. For example, they end up securing astronomically high credit limits -- amounts probably 20 times what they really want, so that they can still have ultralow utilization ratios and still spend like they actually want to. Or they end up making sure they pay their balances down to zero before the billing cycle ends. Etc.
So my perspective is that it's not just people knowing the details of the model, but the fact that the model itself was bad. It was the best model given the limited data that the CRAs provided -- but it was still far from ideal. The truth is that FICO only rewarded a guy for having a 2% utililzation because they couldn't answer the real question they wanted to ask: namely is this guy getting over his head into serious credit card debt?
Absolutely, that is exactly why the payment data is so much more predictive than just looking at balances. The challenge now is how to incorporate it into a generic score that has an additional indicator for consumer payment type (revolver or transactor) the two together would be highly useful for better decisioning.
@cashnocredit wrote:
@Revelate wrote:
@cashnocredit wrote:I'm pretty sure FICO 9 and VantageScore 3 use payment data in addition to balances. FICO pointed out how predictive this payment data was at least a year ago. Doubht they would have subsequently introduced a new score that didn't include it. The data has been reported long enough to have been included in the logistic regression FICO and others do to establish score algorithms.
FICO 9 maybe though I'm not sure on that one as some major lenders like Amex don't report it... though possible it's just a further refinement, if it has that information score accordingly, if not skip.
VS 3 though was developed in 2012 and released early 2013: I don't even think TU/EQ had the historical payment information that point on consumer credit reports? It's possible as Experian I know did looking at my 2011/2012 reports, I should go check some of the older ones off my old system which I haven't tossed out yet.
In my reports EX started reporting payments from wf spring of 2010. EQ was reporting and TU by the end of 2010. However, it took a while before most issuers were reporting in these fields. By summer of 2011 most of them except Citi were. Interestingly, Chase initally reported this info but stopped early last year. I wonder if CRAs were marketting this info to banks seeking transactors and Chase is probably one of the largest issuers to transactors.
So the data has been around a good while but, from some distribution charts I've seen in a recent FICO presentation most people that carry a blance pay within 1.2 times the minimum or less. There are only a handful that pay more than that over the minimums. The rest are transactors.While the people that pay, say, 1/3 the balance have a much lower risk the numbers are small and probably don't affect overall score accuracy much. However, the difference between transactors and revolvers is very significant. There may well be heuristics to try to estimate which people do that from overall balance changes alone. I've seen some indication of that.
How and if this stuff is incorporated into scores appears to be stuff, like balance trending and criteria for scorecards, they don't want to discuss specifically. FICO execs are on record that the payments made field is not used in standard FICO scores through at least FICO 8.
Even if highly predictive, there are regulatory concerns as well and these tend to take more time to test. For instance if the distribution of revolvers v transactors changed with consumer's age they would have to make sure that such shifts did not act as a proxy for age. At least adversely in the case of older folks.
So I can't say for sure whether the payment data is included in FICO 9 or VS3. It has been around long enough but just barely and may not have been around long enough to satisfy regulatory issues. However, FICO 9 and VS3 claim substantial improvements in Gini scores while eliminating paid collections as a score input. Tossing out a previous predictor has to be replaced with something more predictive. Unless including paid collections was simply an error.
My TU report from 6/2014 lists monthly balances/payments for all my bank credit cards and AMEX charge card starting from 12/2011 forward. My Kohls store credit card shows this data starting 3/2012. I recall seeing an article last year through the TU web site indicating VS 3.0 model had the ability to analyze payments relative to balances in scoring. However, it was not clear that the feature was "active" in VS 3.0 as rolled out.
Let us know whether you can find that article, TT. It's worth remembering that TU has its own proprietary scoring system (neither VS nor FICO). For example, in the article I linked to earier, TU mentions that it is beginning to incorporate R/T data into its model, but since the TU spokesman didn't say VS or FICO, I am assuming its TU's own proprietary model. But if you can find an article that mentions VS using the data, that would be fascinating.
Here's another piece, one that supports CnC's view that specialized products are out there being used by the CCCs. It also seems to emphasize the attractiveness of T's to the CCC's -- apparently the fact that they don't pay interest is not a problem. (it also suggests that certain KINDS of R's -- those that run up balances and yet never default -- are also being aggressively courted.)
http://www.cccsso.org/News.asp?NewsID=315