topic Odds of default in SmorgasBoard

Odds of default

Anonymous — Sun, 13 May 2012 04:13:44 GMT

I have this question that I am wondering if anyone has ever seen an answer to out there.

Are the odds of a credit card holder defaulting if they normally carry a balance any higher than if they normally PIF? My immediate thought was yes but I have not seen anything to back this up. It would just seem that the person carrying a balance could more easily slip into trouble than the one who is paying down to zero each month. Obviously something bad like a job loss could strike either one causing an issue. Either one could also spend outside their means causing an issue. But I am thinking the one taking on the interest while carrying a balance could more easily slip into trouble. Maybe this is just one of those chicken and egg questions...

Re: Odds of default

Anonymous — Sun, 13 May 2012 04:53:16 GMT

Credit karma has a chart that shos the odds of.default based on credit score, but i have never seen one that would equate carrying a balance. I think where someone could hurt themself, if they run up big balances on all their cards and then only make the minimum payment. I really dont know the anwer to the question though.

Re: Odds of default

Anonymous — Sun, 13 May 2012 16:48:54 GMT

@Anonymous wrote:
I have this question that I am wondering if anyone has ever seen an answer to out there.

Are the odds of a credit card holder defaulting if they normally carry a balance any higher than if they normally PIF? My immediate thought was yes but I have not seen anything to back this up. It would just seem that the person carrying a balance could more easily slip into trouble than the one who is paying down to zero each month. Obviously something bad like a job loss could strike either one causing an issue. Either one could also spend outside their means causing an issue. But I am thinking the one taking on the interest while carrying a balance could more easily slip into trouble. Maybe this is just one of those chicken and egg questions...

Your FICO score is essentially based on the odds of default from their statistical analysis of the credit population. Since utilization is a significant part of the FICO score, they have deteremined that carrying balances increases the odds of default within the credit population.

Now that does not mean that an individuals odds of defaulting increases because they choose to carry a balance some time. For example, if a person changes his habit from PIF by the due date to PIF before the statement closes and nothing else changes, then that persons odds of defaulting don't change. His FICO score will change because utilization is lower.

Re: Odds of default

Anonymous — Mon, 14 May 2012 02:19:20 GMT

@Wolf3

Sure, the PIF vs the carry a balance type can impact FICO but I was more along the lines of both, at least initially, have roughly the same score. So, you have Person A who carries a balance equal to 8% of his available balance and pays the minimum each month. Person B, does the PIF method but charges about 8% their available balance each month and it reports. The way I understand the FICO "magic", they would have roughly the same impact on score.

So, really what I am thinking about is two individuals being roughly the same but one PIF and one carrying a balance. Sure either one can go bad quickly but I just wonder if one historically has better odds of getting into a bad situation.

I can only imagine that many are wondering why the heck I care. I don't really know why, it is just the kind of thinking being a member of this board has generated. I never thought much about credit until joining and now I have this kind of weirdness knocking around in my mind.