@ChrisinKC wrote:
Well, I completely disagree with you.
Interest rates are completely based off your FICO score. Nothing else is used to determine interest rates.
I don't care how much or how little the things I'm complaining about affect a score. The fact is that those things should not be affecting the score even in the tiniest bit.
If the affect the score just by one lousy point, that's still enough to make someone pay thousands and thousands and thousands of dollars more in interest if their score was right on the line between tiers (739). That one point that was ridicously taken away because someone had a 0 balance on their credit card has now cost them THOUSANDS of dollars.
If you're ok with that, then you must be getting paid by FICO.
Interest rates are not determined solely by FICO scores, the amount borrowed relative to the home value is a fairly big factor as well. They are not really fixed. Each lender has their own cutoffs and ranges. FICO scores tend to matter the most when the mortgage is purchased and insured by a GSE but they are not fixed in concrete.
As for having no balance reporting on any credit card, why on Earth do you think that would have no effect on a credit score?
Not using credit cards at all, which always starts with zero balances reporting on all CC accounts for the last month, is associated with people that have a small, but increasing risk if they resume using credit. It's also associated with highly responsible people right after they lose their jobs. Most people that use CCs and PIF don't like the idea of using CCs if they suddenly lose their income. Especially if they aren't sure when they can pick up other employment. That is highly responsible behavior but it is also a risk indicator because, through no fault of their own, they might not be able to find a job before their savings run out and then have to dip into CC debt for essentials.
Now it doesn't happen often that way but it does happen. So when FICO's algorithms crank through data and see no usage of CCs in the last month they can easily estimate future (two year horizon) default risk as being slightly increased. Say from 1.7% chance to 1.9% chance for example.
Remember, credit reports do not have reliable information on employment or length of employment. They have no information on income, savings or investments. They can make correlations based on CC and other debt based spending but they are loose correlations and can only be made if the spending is done using debt related instruments like CCs or car/home loans. There are many people (like me 10 years ago) that simply didn't use credit at all. Debit cards and checks for everything from food to my last home. So how accurate do you think my FICO score were then?
I found this all out after trying to get credit in order to rent cars. Didn't understand the hassle using a debit card but learned CCs are proxies for "you're not going to steal the or wreck the car." When I found out how grossly inaccurate my FICO scores were I discovered the limitations of the data at the CRAs and how the system worked. Then I worked the system.
As for working at FICO. I've never worked in the industry but I do understand logistical regression and have purchased texts on credit scoring. Fascinating area. I have also walked outside FICO headquarters. Turns out they have spectacular drought tolerant landscaping here in San Diego. Good place to get ideas if you have to deal with that ... which I do.
EtoA: I had no idea FICO had their major facility here. I was going around to 5 different addresses that a Calif. Geen Builder's Assoc. was backing that emphasized energy and water efficiency. Drove to the address and there was this giant FICO on the building. Who knew?
@ChrisinKC wrote:
@cashnocredit wrote:
@ChrisinKC wrote:
Well, I completely disagree with you.
Interest rates are completely based off your FICO score. Nothing else is used to determine interest rates.
I don't care how much or how little the things I'm complaining about affect a score. The fact is that those things should not be affecting the score even in the tiniest bit.
If the affect the score just by one lousy point, that's still enough to make someone pay thousands and thousands and thousands of dollars more in interest if their score was right on the line between tiers (739). That one point that was ridicously taken away because someone had a 0 balance on their credit card has now cost them THOUSANDS of dollars.
If you're ok with that, then you must be getting paid by FICO.
Interest rates are not determined solely by FICO scores, the amount borrowed relative to the home value is a fairly big factor as well. They are not really fixed. Each lender has their own cutoffs and ranges. FICO scores tend to matter the most when the mortgage is purchased and insured by a GSE but they are not fixed in concrete.
As for having no balance reporting on any credit card, why on Earth do you think that would have no effect on a credit score?
The lenders that I'm familar with require a 740+ score for the best APR, and 720 - 739 for the 2nd lowest APR, with the same down payment and on the exact same house. The FICO score tiers didn't change for me based on my down payment or the cost of the house that I bought.
Your credit score is supposed to be a measurement of the risk of potential default at a specific period of time. If I have been making at least the minimum payment on a specific credit card for 20+ years and have never been late, and then one month I pay it off to a $0.00 balance, there should be no reason why anyone should think that I now am a greater risk of defaulting on a $0.00 balance credit card with a $0.00 minimum payment required. If there's no payment required, how could I possibly default? By not making a payment that isn't required?
If your risk level of missing a FUTURE payment increases due to having a $0.00 balance, then what the heck is the purpose of paying on time every month for 20+ years when they still ding you later on? Your payment history and large balances should be used to calculate your risk of default, but if you have $0.00 balance with 20+ years of good payment history, then your risk should be even LOWER than what it was when you had a balance because at that time you actually had a payment that COULD have been missed. I would argue that your income SHOULD be a part of the formula as well, because $1,000 debt to me is a much larger burden to someone who makes less than me, and therefore my score should be higher and there's should be lower.
I thought I explained it fairly clearly but here it is again with the important parts highlighted.
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Not using credit cards at all, which always starts with zero balances reporting on all CC accounts for the last month, is associated with people that have a small, but increasing risk if they resume using credit. It's also associated with highly responsible people right after they lose their jobs. Most people that use CCs and PIF don't like the idea of using CCs if they suddenly lose their income. Especially if they aren't sure when they can pick up other employment. That is highly responsible behavior but it is also a risk indicator because, through no fault of their own, they might not be able to find a job before their savings run out and then have to dip into CC debt for essentials.
Now it doesn't happen often that way but it does happen. So when FICO's algorithms crank through data and see no usage of CCs in the last month they can easily estimate future (two year horizon) default risk as being slightly increased. Say from 1.7% chance to 1.9% chance for example.
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The problem occurs when people are out of work for longer than their safety net allows. Almost everyone will start dipping into CCs rather than not paying rent.
The difference between having a long credit history and a relatively short one is that the risk factor increase starts from a higher base, say 4.7% to 4.9% for someone with a clean history, moderate to low utilization but a short file. The risks deltas associated with the above scenario are similar in both groups and nudge scores lower. The person with the long history still has a significantly better score.
Check your assumptions.
1. I'm not a fan of FICO. It is so dominant that financial institutions are reluctant to change. It's similar to other de facto monopolies like what was once said of IBM: "No one was ever fired for choosing IBM." I think VantageScore 3.0 is more predictive than FICO 8 because it uses the newer payment data, not just ending balances for scores. I'm not sure how it compares to FICO 9.
2. FICO is a , gasp, corporation who's goal is to produce profit by provided a service. The majority of people with low scores will be good borrowers in the future and not default. Credit scoring continues to get better and "better" means identifying more people that are not likely to default. The more consumers so identified the more banks can extend credit and that's the primary way they make money. The incentives don't align to screw people over. Quite the contrary. The rapid increase in computer power is what makes possible extracting better risk estimates from complex and highly variable individual behavior using millions of credit reports. This results in increased credit availability for most people since most people will repay their debts.
