Re: The History of Credit
12-04-2011 01:55 PM
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?
Welcome to the forums!
I think there's an assumption here that FICO is the final arbitor with regards to credit. It's not. If you look at your soft pulls within your CR, you'll find that many of your creditors are looking at your report monthly, for the most part, and others less frequently. They are looking to see if you are adding more credit while keeping balances on your existing accounts, if you are late, how you utilize the balances you have, etc. While a FICO score can be generated off a soft pull, lenders don't always look at that. For example, Barclays is known to close their account with you just because you added more credit cards. The Hooters CC has been known to close your account just because you added a mortgage. You can also have high balances with FICOs in the 700s, and still face CLDs just because your lenders think your utilization is too high. In each of these examples, FICO can remain high, relatively unchanged in many cases, but still face adverse action based on non-FICO info.
As for increasing the APR, it's up to the debtor whether or not they want to charge more. They can opt to pay it off, shelve it, etc. Adding more credit by that person won't get them any further out of debt. In fact, you aren't likely to get approved if you are defaulting anyway and CCCs have been known to cut your limits if the balances are too high, you aren't paying it off fast enough, etc. That's based on what the creditor sees in their own records or via soft pulls. The moment you have a late payment showing is the moment all future credit stops anyway (except for a few trash cards). And if you are late, your CCCs won't let you charge anyway until you are current once again. That's not a function of FICO. And if a debtor gets to a point they can't pay a CC, that's their own doing. Even if you immediately stopped all credit access as proposed, the balances will still get higher and higher if they aren't paying.
BTW, I think the score should punish you more for higher debt. IMO. That 30% or 35% should bump up, not down.