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Should utilization matter more than debt?

Valued Contributor

Re: Should utilization matter more than debt?


BrutalBodyShots wrote:

OpenG wrote:
A hypothetical length of time required to pay off a bal is an interesting approach. After all as the length of time increases so does the probably of some unforeseen event such as job loss. Of course so does the chance of winning the lottery, lol.

True, but I think the chances of one losing their job greatly exceeds the chances of winning the lottery.  Isn't there some crazy statistic on a the percentage of lottery winners that end up broke?  I'd like to sneak a peek at their FICO 08's Smiley Wink

 


I wish the reverse were true. I'd end up retired - certainly not broke.

 

Statistics probably do show that lotto participants are skewed to lower credit scores relative to the general population. Thus, winners would be skewed in that direction as well.

 

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Fico 8: .......EQ 850 TU 850 EX 850
Fico 9: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
VS 3.0:...... EQ 835 TU 835 EX 835
Fico 8 BC:. EQ 892 TU 900 EX 900
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 11 of 43
Established Contributor

Re: Should utilization matter more than debt?

One thing that I see is that the scoring models can give someone a false sense of security.  We advise people to keep their Util under 10%.  We have seen people with $200K CL or much higher.  Having 9% Util might look good for scoring but for some people it could be risky.  Having a $50K income, 300K in CL, and 9% Util might give them a good score but doesn't make good financial sense.

 

A good part of the MyFICO boards is for people in trouble or those like me who have been rebuilding.  We have many people who from loss of job or family illness are teetering on the brink.  There are other sections where people are cheered for getting CLIs regardless of the financial situation.  I know we try to be supportive of others and not judgemental but sometime we need to throw a yellow flag.

 

I always thought that the reason to have credit was to buy a house or reliable transportation to get to work.  Other people have chosing a different path.  Maybe it is my age.  I talk more like my parents who went through the Depression.  I can understand high-income people living a different financial life but most of us are in the same boat.  How do you warn people with judging them or their decisions? 

 

Maybe the FICO scoring methods won't change but we could give others fair warning in a nice manner.

Message 12 of 43
Super Contributor

Re: Should utilization matter more than debt?

Good points in the post above.  The 9% utilization on $200k-$300k in credit lines sort of echoes my original point as that amount of revolving credit debt would be difficult for most people to pay back in a timely manner, even with an above average income.  Those people to me represent higher risk [with respect to the utilization sector of scoring] than someone with just one CC with a $500 limit and a $250 balance that puts them at a 50% utilization.

 

People don't need credit cards really as a debit card could be used.  As you said, people do need credit for things like buying a house, car or other loans.  Unfortunately it's almost impossible to obtain these things without first establishing credit which 99% of the time is going to come via the use of credit cards.

 

 

Message 13 of 43
Valued Contributor

Re: Should utilization matter more than debt?


BrutalBodyShots wrote:

Good points in the post above.  The 9% utilization on $200k-$300k in credit lines sort of echoes my original point as that amount of revolving credit debt would be difficult for most people to pay back in a timely manner, even with an above average income.  Those people to me represent higher risk [with respect to the utilization sector of scoring] than someone with just one CC with a $500 limit and a $250 balance that puts them at a 50% utilization.

 

 


Yes, and I think that will be reflected in credit scoring as well. A profile with a single CC having a $1000 CL at 50% card/aggregate utilization will be impacted differently than a profile with 10 cards having $100k combined CL at 50% aggregate utilization.

 

sum of balances.jpg

 

[Now if both profiles were PIF transactors before due date, should utilization matter?]

Fico 8: .......EQ 850 TU 850 EX 850
Fico 9: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
VS 3.0:...... EQ 835 TU 835 EX 835
Fico 8 BC:. EQ 892 TU 900 EX 900
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 14 of 43
Super Contributor

Re: Should utilization matter more than debt?

TT, I understand that, but we're not talking 50% aggregate utilization with someone with a very small total credit line vs 50% aggregate utilization with someone with very high total credit lines.

 

What we're considering here is someone with a small total credit line having mid-utilization, say 40-50% being scored [with respect to utilization only] worse than someone with 9% utilization on a huge total credit line which could be tens of thousands of dollars of debt as opposed to a couple of hundred bucks for the other guy.

 

Agreed that none of it matters when considering PIF... but who's more likely to PIF, the guy with $200 in revolving debt or $20k in revolving debt, generally speaking?

Message 15 of 43
Established Contributor

Re: Should utilization matter more than debt?

It would be interesting to see some kind of data based on the total available credit vs income of people who have defaulted, ect. Including the amount of default and utilization at the time.
Message 16 of 43
Super Contributor

Re: Should utilization matter more than debt?

That would be interesting to know.

 

I'd also like to know what the ratio is of people that default compared to those that carry high utilization for an extended period of time such as years.  Or forever.

 

For example, say I had $30k in CC debt thrown at me tomorrow.  My income vs expenses wouldn't allow me to pay more than say $300/mo toward that debt.  Not comfortably anyway.  At that rate, with interest, it would take me over 10 years to pay off the debt.  10 years is a long time to go to not experience any major life setbacks that could prevent me from making those $300/mo payments.  I wonder what percentage of people would default at some point during those 10 years.

 

Going back to the earlier discussion, I'd consider myself in this example or anyone else in that situation to be quite a risk, even if their utilization is still a single digit % or barely a 2-digit number.  Again, compared to the guy with the $500 starter card and a $250 balance that's rocking out a 50% utilization with worse scores to show for it. 

Message 17 of 43
Valued Contributor

Re: Should utilization matter more than debt?


BrutalBodyShots wrote:

TT, I understand that, but we're not talking 50% aggregate utilization with someone with a very small total credit line vs 50% aggregate utilization with someone with very high total credit lines.

 

What we're considering here is someone with a small total credit line having mid-utilization, say 40-50% being scored [with respect to utilization only] worse than someone with 9% utilization on a huge total credit line which could be tens of thousands of dollars of debt as opposed to a couple of hundred bucks for the other guy.

 

Agreed that none of it matters when considering PIF... but who's more likely to PIF, the guy with $200 in revolving debt or $20k in revolving debt, generally speaking?


Unfortunately, there is no way to make an unbiased determination on that without knowing capacity to pay. Given income can not be considered, the ways to get a feel are looking at balance(s) relative to credit limit, payment history and possibly inferring something from installment loan amounts. Lenders and CC companies can/do look at income so some extrapolation can be done to determine a minimum likely income based on open. approved loans/loan payments.

 

I like the transparency of VantageScore and the white papers they publish validating scores against known results. Their analysis of data (chart posted up thread) continues to show utilization as a stronger predictive component than balances.

 

 

Fico 8: .......EQ 850 TU 850 EX 850
Fico 9: .......EQ 850 TU 850 EX 850
Fico 4 .....:. EQ 809 TU 823 EX 830 EX Fico 98: 842
VS 3.0:...... EQ 835 TU 835 EX 835
Fico 8 BC:. EQ 892 TU 900 EX 900
CBIS: ........EQ LN Auto 940 EQ LN Home 870 TU Auto 902 TU Home 950
Message 18 of 43
Established Contributor

Re: Should utilization matter more than debt?

There's a simple reason why credit score is based on utilization rather than debt to income:

The bureaus don't know your income.

I think every underwriter agrees debt to income is the better factor but you aren't always required to disclose your income when applying for credit, and even when you do, it might have been years ago that you applied. What if you haven't applied for any credit in the last five or ten years? Your income data, even if reported, would be terribly out of date.

So the bureaus ASSUME utilization is proportional to income which isn't a bad assumption most of the time, but it's clearly wrong some of the time.

Note that this is exactly why a mortgage application will look at your income and use credit score as only one factor. For such a big transaction they will verify your income and do it right.

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Message 19 of 43
Super Contributor

Re: Should utilization matter more than debt?

But income can't be assumed based on utilization... as illustrated above you can have two average people each with $50k income and one has a single $500 credit card and the other has $200k in credit lines.  One owes $250 (50% utilization) and the other owes $18k (9% utilization).  Based on those utilization numbers and amounts owed, there is no way to determine or even infer income at all.

Message 20 of 43