Re: The History of Credit[ Edited ]
12-04-2011 12:27 PM - last edited on 12-04-2011 12:37 PM by llecs
Thanks for this history. I've been looking for why FICO (Fair Issac Corp) started this formula for consumer credit. The reason I'm seeking an answer to "why" is because it seems the formula is more beneficial to the lender (obviously), but almost too beneficial. Here's why I say this.
When a poor credit risk is identified, instead of having their credit "cut off" automatically, many times they are charged a higher interest rate. This creates a situation where they will owe more money. If they initially had a problem paying their debts, then how does charging them more money help them - or the lender? A poor payment history and a large amount of debt is 65% of their FICO score - only 10% of their score weighs the amount of credit the APPLY FOR! Wouldn't increasing the percentage of the latter help reduce an individual's risk of building a large amount of debt? No credit, no charging. It makes sense to me, but it seems that banks would no longer make the money they are making now off of these individuals. So the solution to me is to simply cut off a person's credit when they begin seeking too much credit. This will prevent debt from accumulating. The way it is set up know allows a poor credit risk to build debt and never be able to pay it all off (just minimum payments, which we know is the kiss of death).
So the FICO score is designed to unfairly benefit lenders by allowing poor credit risks to saddle themselves with debt.
Has there ever been a movement to change up this percentage?
thanks - edited to remove a full name.