topic Re: Is FICO. A scam? in Understanding FICO® Scoring

Is FICO. A scam?

Anonymous — Fri, 25 Jul 2014 08:11:11 GMT

My main issue is ths 'score' has circumvented the lender to borrower relationship. This simple score dictates way too much... no decision taken by bank, just an algorithm now. FICO doesn't consider: age;experience; work history; education; field of work; location; family; savings; spending (cash) and much more. It's really a foolish mess. I've had okay credit for 20 years, yet oddly, haven't missed one payment in that time, regardless of what FICO thinks or tries to predict. I'm a programmer, and to be honest, I'd fire the lot that came up with this "roll of the chicken bones"... yep it's a game only, with my only real advice is to learn how to play it, and it has little to do with paying off debt!

OP, I started a new thread for you. ~Lexie

Re: Is FICO. A scam?

Revelate — Fri, 25 Jul 2014 15:10:02 GMT

@Anonymous wrote:
My main issue is ths 'score' has circumvented the lender to borrower relationship. This simple score dictates way too much... no decision taken by bank, just an algorithm now. FICO doesn't consider: age;experience; work history; education; field of work; location; family; savings; spending (cash) and much more. It's really a foolish mess. I've had okay credit for 20 years, yet oddly, haven't missed one payment in that time, regardless of what FICO thinks or tries to predict. I'm a programmer, and to be honest, I'd fire the lot that came up with this "roll of the chicken bones"... yep it's a game only, with my only real advice is to learn how to play it, and it has little to do with paying off debt!

OP, I started a new thread for you. ~Lexie

A FICO score doesn't take those factors into account, but I can assure you the lenders do.

The score is just one factor in their underwriting, and the minimum score for a whole slew of products is pretty low, but some of the other hurdles are non-trivial and if you don't meet them you're out of the pool much like you would be if your FICO score doesn't rate. Really the only place where FICO is utterly set in stone is on the conventional and FHA (possibly USDA/VA) third-party guarunteed or purchased where it's absolutely not negotiable (ignoring secondary and unconventional qualifications, even those are set just by different guidelines).

For everything else, there's a non-trivial element of let's make a deal with the bank.

Re: Is FICO. A scam?

nycfico — Fri, 25 Jul 2014 17:33:48 GMT

Think of a FICO score sort of like an SAT score when applying to college. It's one consideration...an important one and perhaps a show stopper to some lenders(colleges), but there are a bunch of other things that matter a whole lot too (for college, grades, extracurriculars, recommendations, interview). For loans, it's income, savings, affordability, length of employment, etc.

Re: Is FICO. A scam?

cashnocredit — Fri, 25 Jul 2014 21:08:27 GMT

@Anonymous wrote:
My main issue is ths 'score' has circumvented the lender to borrower relationship. This simple score dictates way too much... no decision taken by bank, just an algorithm now. FICO doesn't consider: age;experience; work history; education; field of work; location; family; savings; spending (cash) and much more. It's really a foolish mess. I've had okay credit for 20 years, yet oddly, haven't missed one payment in that time, regardless of what FICO thinks or tries to predict. I'm a programmer, and to be honest, I'd fire the lot that came up with this "roll of the chicken bones"... yep it's a game only, with my only real advice is to learn how to play it, and it has little to do with paying off debt!

OP, I started a new thread for you. ~Lexie

"Relationship" lending has been on a decline for decades. It is virtually impossible for banks to assess future portfolio risk based on "relationship" decisions and it is prone to individual judgment quirks. There have been numerous studies that have shown lending can be more reliably and profitably done by minimizing the judgement factor.

Since you are a programmer you might look into how logistical regression and scorecard grouping is used to create credit score models.

Re: Is FICO. A scam?

Anonymous — Fri, 23 Jan 2015 15:04:34 GMT

Well I think jmktok has valid points.
it doesn't encourage people to pay off previous debt when they can wait 7 years for removal AND paying off the debris doesn't improve your credit score.

Also, penalizing people for paying off an installment loan is ridiculous. I know they say having a monthly payment shows you can make them but the point in having a loan is to pay it off one day. So if you can do this early it should show you have better money management skills not penalize you because the lender didn't get the last portion of interest.

Re: Is FICO. A scam?

lord_kinbote — Fri, 23 Jan 2015 21:37:25 GMT

@Anonymous wrote:
Well I think jmktok has valid points.
it doesn't encourage people to pay off previous debt when they can wait 7 years for removal AND paying off the debris doesn't improve your credit score.

Also, penalizing people for paying off an installment loan is ridiculous. I know they say having a monthly payment shows you can make them but the point in having a loan is to pay it off one day. So if you can do this early it should show you have better money management skills not penalize you because the lender didn't get the last portion of interest.

My understanding is, you are not penalized for paying off an intallment loan. You simply put points back on the table for not having a mix of credit. I know it can be a bit perplexing at first, but once you understand the basic principles, its not difficult to understand how positive FICO scores are obtained. However, in case of baddies, it can take quite a bit of time before implementing good FICO scores.

Re: Is FICO. A scam?

Anonymous — Fri, 23 Jan 2015 21:34:55 GMT

This is going to be a great thread to follow. I think the biggest problem is we tend to look at it from a personal standpoint. Look at it from the other side. You are a giant lender, looking at hundreds of thousands of profiles a week. Your goal is not to weed out any individual that wont pay their bills. Its to understand what percentage of a specific group of people wont. Take a broup of relatively solid scores. Say ficos of 700 to 730. No matter how perfect you work out the math some of those people are going to not pay.

Variables are just too high. Job loss, unplanned children, heck death. But if you know that say 3 percent in that group will default on X amount of debt, you know you need to profit x +y + z on the rest of that group where y represents your costs, and z shows profit to your investors. Obviously any individual within the group is not really imprtant, its the performance of the group. Now if the economy is humming along z may be a large number. If not, or actuarial tables cant account for the default rates, z might be a negative number.

Any one person within the group may have any of 4 possible outcomes. Pay their bills, not pay pay their bills, or leave that group by raising or lowering their scores. Having a hard numbrr to make a lending decision at any one point in time is both invaluable and worthless. But as a consumer that one second decision can cause a huge change, for the lender it is simply a decision on whether to increase the pool and mitigate or increase the risk.

Re: Is FICO. A scam?

HiLine — Sat, 24 Jan 2015 00:50:58 GMT

What is really happening is people's misunderstanding of the purpose of credit scores.

Credit score does not really estimate creditworthiness like most people would think. What is represents is credit management habits, regardless of income level. I will give you an example of what credit score predicts and one example of what it does not.

Say A earns 100k a year, and so does another individual named B. Each of them has 2 credit cards and 1 auto loan.

A always pays credit card bills and installment amounts on time. B, however, keeps missing these payments. Why is that?

Most likely, B lives beyond his means, does not take into account his debt obligations in his budget, and runs out of money all the time, making him unable to make timely payments. He has to open new credit cards and loans to pay his older debt. A, on the other hand, is frugal, does not overspend, and has enough money left over every month to make the payments because he plans the debt in his budget. 2 years down the road, the debt B has accumulated is so large that his monthly interests are larger than what he has left over after his other expenses, so he refuses to make payments altogether; he is in default.

Credit score is supposed to predict situations like A's vs B's, regardless of their income: they make the same, but one ends up in default, and the other does not, and this is because B has much better debt management habits.

Now let's say we have 2 other individuals: C and D. Each of them has a credit card with a $20k limit. C makes $30k per year and lives in Manhattan, while D makes $100k and lives in Kansas City. Their credit profiles are identical. C puts most of his expenses one his credit card and makes the minimum payment every month. D puts his expenses on his credit card as well, but always pays off the full balance. In 2 years, C's credit card debt has grown to 10k, at which point C realizes he can never pay off the balance and files for bankruptcy. His credit score is stellar, and yet he is in default.

Credit score is not supposed to predict situations like C's vs D's. They both have excellent credit and exhibit good debt management habits, but one ends up in default and the other does not. This is where other factors such as income, DTI, cost of living, etc. come into play.

When determining whether they should extend credit, a lender looks at the overall financial picture of the borrower including credit score, specific credit profile, income, cost of living, DTI, etc. Credit history is only one factor among many that determine creditworthiness. We need to stop saying that credit score determines creditworthiness. This is plain wrong.

Re: Is FICO. A scam?

cashnocredit — Sun, 25 Jan 2015 02:55:49 GMT

This article by a credit risk blogger discusses the evolution of credit from personal relationship lending to fixed processes and scoring. It's not specific to FICO but looks at the way credit has evolved in both the developed world and emerging countries. It explains the driving force behind credit scoring which enables more people to more easily obtain credit at a given, overall risk and profit level.

Developing to Developed: The Evolution of Credit Risk Strategies

https://blegrange.wordpress.com/2011/03/15/evolution_of_credit_risk_strategies/

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 16:39:14 GMT

Well I'm looking at it as someone who's paid in cash for 20 years.
I'm about to buy a house with cash again because I don't have the time to wait for aaoa.

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 16:48:56 GMT

Akula:
My understanding is, you are not penalized for paying off an intallment loan. You simply put points back on the table for not having a mix of credit. I know it can be a bit perplexing at first, but once you understand the basic principles, its not difficult to understand how positive FICO scores are obtained. However, in case of baddies, it can take quite a bit of time before implementing good FICO scores.

Potato patato.
Either way you put it you lose points for paying off installment loans.

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 16:53:41 GMT

And one other thing. Banks used our tax money for a bailout. Therefore the methods they use to make decisions on mortgage loans is very important.

Re: Is FICO. A scam?

Revelate — Wed, 28 Jan 2015 18:13:58 GMT

@Anonymous wrote:
Well I think jmktok has valid points.
it doesn't encourage people to pay off previous debt when they can wait 7 years for removal AND paying off the debris doesn't improve your credit score.

Also, penalizing people for paying off an installment loan is ridiculous. I know they say having a monthly payment shows you can make them but the point in having a loan is to pay it off one day. So if you can do this early it should show you have better money management skills not penalize you because the lender didn't get the last portion of interest.

Whoa wait a second .

@Anonymous wrote:
Well I'm looking at it as someone who's paid in cash for 20 years.
I'm about to buy a house with cash again because I don't have the time to wait for aaoa.

Here you suggest you're about to pay cash for a house because you don't have time to wait for AAOA; therefore by that logic, how would not paying not be encouraging people to pay off previous debt?

Vast majority of people in America cannot pay for a house in cash. I agree with your premise that if you have plenty of cash, FICO = whatever, and I lived that life for 15 years... I can't now though, and suddenly when you need credit and you don't have it, I assure you those 7-10 years well and truly suck: that's from direct personal experience where I can't just throw cash at a house here in S. Cali.

As for the repayment of debts not helping score, some truth to that but eventually FICO and the GSE's will catch up to the rest of the lending world and that will change: if they don't, Vantage Score may well make serious inroads because for a fact UW doesn't consider a paid collection or tax lien or judgement to be the same as an open one.

Also FICO != underwriter. I too think it's silly that I'm worse of a credit risk according to FICO because I paid my auto loan off though it's possible I had compensating factors in my file so it's hard to say in my case as that was a pretty buffer with my mixed file; however, it's what we have. Will say if you can throw down 30% or more at some point there's going to be something close to a no-doc mortgage somewhere, if you are paying cash only because you can't wait, I'd talk to a lender or two and see if they'd play ball, especially one that portfolios loans themselves if you'd rather get the mortgage.

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 19:12:48 GMT

Here you suggest you're about to pay cash for a house because you don't have time to wait for AAOA; therefore by that logic, how would not paying not be encouraging people to pay off previous debt?

I don't understand your question.
what I was saying is that when people simply pay a collection they don't improve their score. Only PFD will improve it then it could bring down your aaoa.
So there is no benefit to your score when you simply pay a collection.

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 19:22:28 GMT

And why isn't the history of having paid off installment loans as positively reflected as having a current installment loan?
The score is based on your credit history correct?
So I would think showing that you have paid successfully would weigh in.

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 19:25:33 GMT

I could just be totally wrong but right now I truly think the whole system aims more to help raise interest rates and encourage debt.

Re: Is FICO. A scam?

HiLine — Wed, 28 Jan 2015 19:41:16 GMT

@Anonymous wrote:
And why isn't the history of having paid off installment loans as positively reflected as having a current installment loan?
The score is based on your credit history correct?
So I would think showing that you have paid successfully would weigh in.

Why isn't the history of having paid off credit cards as positively reflected as having a currently open credit card?

Re: Is FICO. A scam?

HiLine — Wed, 28 Jan 2015 19:43:19 GMT

@Anonymous wrote:

So there is no benefit to your score when you simply pay a collection.

I can understand the logic behind this. Even when you pay a collection, you have already defaulted on your debt, and since the whole point of FICO scores is predicting your probability of defaulting, it should not matter whether you paid off a collection. It is whether there is a collection that matters.

Re: Is FICO. A scam?

Anonymous — Wed, 28 Jan 2015 20:02:46 GMT

I understand what you're saying. It still to me doesn't encourage people to pay off a collection because they are already deemed unreliable.
But I would think that even if they paid it late it would give some benefit of the doubt to their willingness to pay rather than not pay at all.

Re: Is FICO. A scam?

Revelate — Wed, 28 Jan 2015 20:18:01 GMT

@Anonymous wrote:
I understand what you're saying. It still to me doesn't encourage people to pay off a collection because they are already deemed unreliable.
But I would think that even if they paid it late it would give some benefit of the doubt to their willingness to pay rather than not pay at all.

Underwriting doesn't consider a paid collection anywhere nearly as bad as an open one.

As mentioned that's changing, FICO 9 already utterly discounts paid collections; however it's not used anywhere yet and it'll be even longer before it's adopted in the mortgage industry unfortunately.

I'll be first to admit some of the things in the system aren't accurate in the modern market, but it's worked for a long time and it's being improved towards modern standards; however, I wouldn't go as far as to state it's all a scam. Fact is the person who never got the collection in the first place is a better risk than the person who has any sort of one... but like you I completely agree that someone who got righteous with their debts eventually is a better risk than someone who never does.

FICO agrees apparently, and the CRA's agreed before that (VantageScore discounted them earlier, and 3.0 even discounts my paid tax liens apparently which FICO 9 should too but probably doesn't, weaksauce the IRS changed ~5 years ago), and before that pretty much all underwriters did; however, FICO is the slowest of all of them to change, and that's just the nature of the beast when we're talking algorithms that underwrite a massive amount of our economy. Doesn't help when they're a virtual monopoly either in terms of nimbleness, eventually they'll likely have to adapt as there's too much money in it, and we don't have to look further than American auto industry or Japanese electronics to read the tea leaves on that.