topic Re: flawed FICO scoring system in Understanding FICO® Scoring

flawed FICO scoring system

Anonymous — Sat, 21 May 2016 19:29:22 GMT

My wife and I are octogenarians and took out a mortgage when we relocated from New York to North Carolina 16 years age. Our FICO score has been stuck on 840 +/- a couple of points for all this time. Last year we sold an investment that was losing money and decided to pay off the 6.5% mortgage. This resulted in a savings of over $16,000 in interest over the term balance of the mortgage. In effect we invested in a product with a guaranteed return of $16,000 over a 15 year period. The very next month after we paid off the high interest mortgage our FICO score dropped 25 points.

This suggests that someone who manages their investments and is prudent with spending their resources is less financially responsible than someone who maintains open account balances and is probably in debt up to their neck is a better loan risk. This makes no sense at all. The FICO scoring procedure is seriously flawed and does not reflect a more conscience financial manager but rather a person who is more likely at some point in the future to default on a sizeable loan.

Re: flawed FICO scoring system

Anonymous — Sat, 21 May 2016 19:36:41 GMT

FICO scoring i based of your credit usage. If you pay off your mortgage and it was your only open installment loan, you now have an area where you have no usage. I agree that it doesn't take into account your good money management in that regard.

I don't know if I would call it flawed, but I understand why it can be frustrating.

Re: flawed FICO scoring system

Anonymous — Sat, 21 May 2016 22:43:44 GMT

I'd rather have a paid off home, than the extra 25 points on my Fico score.

Re: flawed FICO scoring system

Thomas_Thumb — Sat, 21 May 2016 22:56:03 GMT

Agreed - I have 4 long years left on my mortgage. I'd much rather be done with it and take the point hit.

Re: flawed FICO scoring system

SouthJamaica — Sun, 22 May 2016 13:29:20 GMT

@Anonymous wrote:
My wife and I are octogenarians and took out a mortgage when we relocated from New York to North Carolina 16 years age. Our FICO score has been stuck on 840 +/- a couple of points for all this time. Last year we sold an investment that was losing money and decided to pay off the 6.5% mortgage. This resulted in a savings of over $16,000 in interest over the term balance of the mortgage. In effect we invested in a product with a guaranteed return of $16,000 over a 15 year period. The very next month after we paid off the high interest mortgage our FICO score dropped 25 points.

This suggests that someone who manages their investments and is prudent with spending their resources is less financially responsible than someone who maintains open account balances and is probably in debt up to their neck is a better loan risk. This makes no sense at all. The FICO scoring procedure is seriously flawed and does not reflect a more conscience financial manager but rather a person who is more likely at some point in the future to default on a sizeable loan.

The fallacy in your thinking is that you think FICO is just about "prudence", "financial responsibility", and "risk".

I've come to the conclusion that, contrary to the industry's public pronouncements about what FICO is about, it's not just about assessing "risk", it's also about assessing "reward".

I.e., it's also about assessing profitability.

They make money from debt slaves.

They make no money from the debt free.

Just be glad you're done with the mortgage.

And congratulations btw.

Re: flawed FICO scoring system

Aahz — Sun, 22 May 2016 00:57:35 GMT

Y'all are looking at how the FICO scoe was developed and how it is intendnded to work from the wrong direction.

Mr. Fair & Mr. Isaac did not sit down and ask: if a person pays off their mortgage are they more reliable or less reliable?

Rather, they sat down and asked: based on the millions of datapoints we've collected over the years is a person who currently has a mortgage more likely or less likely to become 30 days late on a loan?

The answer to that question was (surprisingly to many) that people currently paying a mortgage are less likely to get a 30 day late. Hence, people with an active mortgage receive a boost to their scores.

You may "believe" that is a flawed way to look at things, but 60 years of hard data from millions of consumers proves the fact that your belief is flawed, not their data.

Re: flawed FICO scoring system

CreditMagic7 — Sun, 22 May 2016 00:58:55 GMT

Completely and unequivocally agree with both the decision to wrap things up on the investment like you done as well as the frustration of discovering the FICO points deduction due to that smart course of action.

Fact is (for better or worse) FICO has assignment RULES that apply directly to the CREDIT MIX category (Installment/Term Loans of most any type) and is one of those areas where most people frequently discover a significant drop after paying off those types of loans.

As above reply points out, the part which notes about "assessing profitability" has it's own applicable rules to the FICO scoring formula too.

Re: flawed FICO scoring system

Anonymous — Sun, 22 May 2016 02:56:37 GMT

A 840 credit score dropping to 815 isn't the end of the world. Realistically you can still do just about everything without those 25 points that you lost. If it bothers you that much, use another one of the system "flaws" and open up a share secure loan for $500 and get your 25 points back.

Re: flawed FICO scoring system

Revelate — Sun, 22 May 2016 05:08:26 GMT

@Anonymous wrote:
A 840 credit score dropping to 815 isn't the end of the world. Realistically you can still do just about everything without those 25 points that you lost. If it bothers you that much, use another one of the system "flaws" and open up a share secure loan for $500 and get your 25 points back.

This.

Fact is the share secure loan counts identically to a mortgage anyway, FICO 8 (and 98) doesn't care what the installlment loan is, just that it's open and at a pretty utilization metric.

Method:
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secure-technique/m-p/4506756#U4506756

Gory Theory:
http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Installment-tradeline-utilization-thread/m-p/4055989#U4055989

Re: flawed FICO scoring system

Anonymous — Sun, 22 May 2016 13:25:27 GMT

Right on above.

I find the installment loan "flaw" to be rather unimportant as there's an easy work around for it that can be accomplished with little time and investment.

My personal opinion which I've argued in another thread which I know I'm slightly biased toward since it strikes home with me is a "flaw" in the payment history category since it's far more impactful being the #1 scoring criteria than "credit mix" or anything else.

You could have 2 guys with a 120 day late on their credit reports from 1 year ago... 1 guy legitimately blew off making his payments for whatever reason, be it being irresponsible/broke or what have you and is behind $2000, then you have another guy who legitimately thought he paid off a loan or CC prior to leaving the country for 6 months of millitary service only to come back to find 2 bucks of interest somehow was reported being outstanding for the last 120+ days. In the eyes of FICO, both of these individuals have shown equal lack of creditworthiness and both will take the same negative blow to their FICO scores.

Re: flawed FICO scoring system

Anonymous — Sun, 22 May 2016 13:53:16 GMT

If you extent this philosophy throughout our economy what you are saying is that debt is a positive entity and that more debt is good for those living and working in America. This is preposterous. Our country's massive debt is unsustainable. Our country's financial system will soon collapse under the weight of this debt. FICO encourges debt and this policy is drowning the citizens in debt. The average debt of every man, woman and child in America is $54,000. Total personal debt is $17.5 Trillion. This is unsustainable. I'm sorry Mr Fair and Mr Issac but your system is flawed. The sad thing about it is that this flaw will not be recognized until the collapse of this country's financial system.

Re: flawed FICO scoring system

SouthJamaica — Sun, 22 May 2016 14:43:57 GMT

@Anonymous wrote:
If you extent this philosophy throughout our economy what you are saying is that debt is a positive entity and that more debt is good for those living and working in America. This is preposterous. Our country's massive debt is unsustainable. Our country's financial system will soon collapse under the weight of this debt. FICO encourges debt and this policy is drowning the citizens in debt. The average debt of every man, woman and child in America is $54,000. Total personal debt is $17.5 Trillion. This is unsustainable. I'm sorry Mr Fair and Mr Issac but your system is flawed. The sad thing about it is that this flaw will not be recognized until the collapse of this country's financial system.

Re: flawed FICO scoring system

Anonymous — Mon, 23 May 2016 00:09:35 GMT

@Anonymous wrote:
If you extent this philosophy throughout our economy what you are saying is that debt is a positive entity and that more debt is good for those living and working in America. This is preposterous. Our country's massive debt is unsustainable. Our country's financial system will soon collapse under the weight of this debt. FICO encourges debt and this policy is drowning the citizens in debt. The average debt of every man, woman and child in America is $54,000. Total personal debt is $17.5 Trillion. This is unsustainable. I'm sorry Mr Fair and Mr Issac but your system is flawed. The sad thing about it is that this flaw will not be recognized until the collapse of this country's financial system.

I disagree. FICO doesn't "encourage debt" nor does it suggest that "more debt is good" as you put it. You can have a 800-850 score and have no debt at all. There are plenty of people on this forum that may use a ton of credit cards but PIF every month and as a result have great credit scores to show for it. That's not debt. The category of utilization for example deducts points for increased debt and increases points when debt is paid down which is completely converse to your argument.

Re: flawed FICO scoring system

SouthJamaica — Mon, 23 May 2016 03:41:13 GMT

@Anonymous wrote:
@Anonymous wrote:
If you extent this philosophy throughout our economy what you are saying is that debt is a positive entity and that more debt is good for those living and working in America. This is preposterous. Our country's massive debt is unsustainable. Our country's financial system will soon collapse under the weight of this debt. FICO encourges debt and this policy is drowning the citizens in debt. The average debt of every man, woman and child in America is $54,000. Total personal debt is $17.5 Trillion. This is unsustainable. I'm sorry Mr Fair and Mr Issac but your system is flawed. The sad thing about it is that this flaw will not be recognized until the collapse of this country's financial system.

I disagree. FICO doesn't "encourage debt" nor does it suggest that "more debt is good" as you put it. You can have a 800-850 score and have no debt at all. There are plenty of people on this forum that may use a ton of credit cards but PIF every month and as a result have great credit scores to show for it. That's not debt. The category of utilization for example deducts points for increased debt and increases points when debt is paid down which is completely converse to your argument.

I beg to differ. If you borrow money from someone and are obligated to pay it back, that's "debt"

Re: flawed FICO scoring system

RonM21 — Mon, 23 May 2016 04:02:36 GMT

Yes the Fico scoring can be strange at times. But I think you still do what is best for you, before doing something else.

Re: flawed FICO scoring system

SouthJamaica — Mon, 23 May 2016 16:16:29 GMT

@RM21 wrote:
Yes the Fico scoring can be strange at times. But I think you still do what is best for you, before doing something else.

Unfortunately, the way our society is set up, one of the things we do need to do is pay attention to our FICO score. You never know when it's going to rear its head.... it's not just credit cards, auto loans, and mortgages. It also comes up when renting an apartment, cosigning on a lease, taking out car insurance, getting a cell phone, etc.

So I find it hard to distinguish what's best for me, and what's best for my FICO score, because the fact is that one of the things that is best for me is having a good FICO score.

It's unfortunate, even foolish, that the FICO algorithm will ding you for having all your credit cards paid down to zero, and hammer you if you've paid off all your installment loans and have none open. But I'm glad that I learned about it.

Re: flawed FICO scoring system

Anonymous — Mon, 23 May 2016 23:30:56 GMT

Your story of the 2 men and their overdue accounts is a perfect example to illustrate that there is dysfunctions and bias in the seriously flawed system. Their IT program only knows the difference between day and night. Nothing else matters and that is intentional. Any justification of late payments does not even include death. And every citizen is subjected to this irrational review. Only in America can something like this happen.

Re: flawed FICO scoring system

Thomas_Thumb — Mon, 23 May 2016 23:43:19 GMT

@Anonymous wrote:
Your story of the 2 men and their overdue accounts is a perfect example to illustrate that there is dysfunctions and bias in the seriously flawed system. Their IT program only knows the difference between day and night. Nothing else matters and that is intentional. Any justification of late payments does not even include death. And every citizen is subjected to this irrational review. Only in America can something like this happen.

Not true.

P.S. I believe Experian is a British company.

Re: flawed FICO scoring system

yapsalot — Tue, 24 May 2016 00:03:50 GMT

ws237,

I agree with you completely. In my experience, FICO is capricious, arbitrary and inscrutable. Its like the issuance of credit in this country is based upon the readings of an ouija board. My score goes up and down for reasons that are unexplained and unrelated to my credit report. For example, today my FICO score on TU went from 788 to 800 without any quantifiable difference in my risk as a borrower, and without any known difference in my credit report (I pulled my credit report yesterday and today and they are indistinguishable). Whats sort of hypocritical is that both the 12 point jump and a three point drop a few day ago are accompanied by the exact same explanatory language. I am starting to think FICO is more like a mysterious video game that's just waiting to be played. If I recall correctly, the MyFico website states that 90% of all lenders in this country use FICO scores in granting credit. If that's true, what's really sad is that millions of people are paying interest rates that do not match the risk of lending to them. Maybe banks don't care if its a flawed system because they are making tons of money with it by charging more than the risk warrants - I just don't know.

Re: flawed FICO scoring system

Anonymous — Tue, 24 May 2016 01:00:56 GMT

@SouthJamaica wrote:
I beg to differ. If you borrow money from someone and are obligated to pay it back, that's "debt"

In the truest sense of the word, sure... but you and I both know that it's not real "debt" if you immediately pay it back, ie essentially using credit cards the exact way one uses debit cards, just adding 1 more step in the process to flow those dollars through the card. In this example there is no "real" debt yet someone can achieve a phenomenal credit score acting in this method. And many do.