@iv wrote:
@Anonymous wrote:
Why doesn't FICO scoring take into account how much interest one pays? In my case, it's zero, year after year.
Be careful what you ask for! There ARE scoring models that take into account how much interest you pay... but in those models, you're considered a "deadbeat". (Not making any revenue for the lender except for swipe fees, and costing them points/cashback/perks.) Someone with a maxed-out card at 29.99% APR who pays (only) their minimums on time every month, on the other hand, looks great on a revenue score! (These revenue scoring models are generally only run internally by a lender, using both CRA data and internal data.)
Actually I suspect this sort of consumer would also be in a high risk bucket. Sure they're paying their monthly minimums every month, but if that's all they're paying month after month, the banks aren't exactly making much off of them. Plus it could be an indication of high financial stress, and all it takes is one unexpected expense for the whole thing to crumble.
But to your point, Discover does target what they term "prime revolvers" -- the people who are financially stable enough to consistently pay well over the minimum month after month, but not so well off they can PIF year after year incurring 0 interest charges the whole way through. These are the true cash cows for any creditor.
If I had to guess, I'd probably be worse than a deadbeat on a revenue score. Not only do I PIF, but I also PTZ before the statement cuts so they can't even count on me accidentally forgetting to pay once in a blue moon and charge me late fees. 
OP, could you list out your cards, the bank, what your credit limit is, and typical statement balance? The theoretical methods of improving FICO score are easier to apply to an actual list of cards.
The purpose of the list is to enable recommendations where you could get SP CLI to make it a little easier to improve your scores.
Also, what are your FICO 8 scores?
The purpose of the list is to enable recommendations where you could get SP CLI to make it a little easier to improve your scores.
Also, what are your FICO 8 scores?
@arkane wrote:
@iv
Someone with a maxed-out card at 29.99% APR who pays (only) their minimums on time every month, on the other hand, looks great on a revenue score! (These revenue scoring models are generally only run internally by a lender, using both CRA data and internal data.)Actually I suspect this sort of consumer would also be in a high risk bucket.
Well, yes. Of course. But a consumer who is in a high-default-risk pool (with the high APRs that go with that), but does not actually default, is a high-profit customer for the lender!
@arkane wrote:Sure they're paying their monthly minimums every month, but if that's all they're paying month after month, the banks aren't exactly making much off of them.
Minimum payments on high APR cards is a huge profit source for lenders... at least for non-defaulting accounts.
Look at the math... if you have a $1,000 card at 29.99%, maxed out, and paying only minimums:
In the not-too-distant past, a common minimum payment was $25 or the total interest/fees. (Most lenders are now setting it higher, 1% of balance plus interest charges, which is a VERY GOOD thing for the borrower... and helps avoid the horrible numbers below.)
The monthly interest is... $24.99. (Really! Check the numbers yourself, it's kinda eerie how they line up on this example.)
Even if you never put another charge on the card again, it'd be almost five years before you'd paid a single dollar of principal down.
In the time it took to pay down that single dollar, you would have paid about $1,400 in interest on that $1,000 balance - and you'd still owe $999! Even if you defaulted at that point, the lender would have made a pretty good total profit.
If you didn't default, never paid more than the minimum, and never charged on the card again, it'd take over 27 years, and over $8,000 (over $7,000 of which is pure interest) to pay off that $1,000.
Paying just one dollar extra monthly, over the minimum ($26 instead of $25) means total payments drop to just over $3,400 (about $2,400 interest), and payoff is in 11 years. One. Dollar. Extra. Monthly. $4,600-ish difference in interest payments.
So yeah, low minimum-only payments are very profitable, when made by customers who don't default. (Also, bluntly, kinda evil. The move to $35+ minimums is probably one of the best things to happen to habitual revolvers this century.)
Even with the fairly recent changes to minimum calculations, if the customer keeps "re-maxing" the card when it has available credit, they'll still be stuck in the same situtation.
@arkane wrote:But to your point, Discover does target what they term "prime revolvers" -- the people who are financially stable enough to consistently pay well over the minimum month after month, but not so well off they can PIF year after year incurring 0 interest charges the whole way through. These are the true cash cows for any creditor.
True, the lender also profits quite a bit from someone who manages to lose the grace period, revolves that $1,000 monthly, but also charges and pays $1,000 monthly... the lender gets the swipe fees and the interest payments.
However - that "prime revolver" is unlikely to have a 29.99% APR from Discover. (And Discover does higher minimum payments than the industry average - absolute minimum $35, or 2% of the balance, or $20 plus any interest/fees - even if they did have a 29.99% APR, you couldn't get caught in that 27-year/$7,000 nightmare - you'd start with a $45 minimum, pay it off in a couple of years, paying less in interest than principal).
The actual lender profit from an individual "prime revolver" may end up far lower than the maxed revolver example - yes, they will collect swipe fees (but at very low single-digit percentage rates), and the APR on the no-grace-period revolving balance is more likely to be in the 8% to 18% APR range. In the lender's "worst case", they may make a third of the profit from the "prime revolver" as from the "maxed revolver", in the lender's "best case" they might make 30% more. (All depends on the actual APRs, and when charges and payments are made - affecting the average daily balance.)
Now, if you also factor in the default rates from both pools, given that the default rate of the always-maxed pool is likely to be higher than that of the "prime revolver" pool... the total rate of return from both groups may end up closer (or inverted). And that's where risk scores and revenue scores interact...
@arkane wrote:If I had to guess, I'd probably be worse than a deadbeat on a revenue score. Not only do I PIF, but I also PTZ before the statement cuts so they can't even count on me accidentally forgetting to pay once in a blue moon and charge me late fees.
And on rewards cards, hitting category spending whenever possible, I assume?
Yeah, you're not a big profit source. If you're really on top of the categories, you might be costing them more than they make from your swipe fees.
Of course... you do realize that the only reason people like you (and me...) can play those games, and make a profit for ourselves from regular daily transactions... is the behavior of the poorly-informed (or "trapped") customers who do pay all that interest, fees, etc. That's the real source of the profit we make from rewards cards - the bank is basically just passing us part of the profits from the suckers...
I do actually feel bad about that sometimes. Doesn't stop me from using the rewards cards, though.
Yes I'm aware of the horrific APR math. I guess what I failed to articulate is, I highly doubt those who make (and only make) the minimum payments month after month are:
1) Actually concerned about paying off the principal; they're likely far more focused on short term survival i.e. making it through the month or until the next paycheck comes. Which leads to...
2) In no danger of defaulting (quite the opposite I suspect)
In the first example, it would take roughly 3 yrs 4 mos to rack up $1000 in interest, the break-even point for the lender. If the borrower defaults at any point before that, the lender would actually have lost money instead. (note I'm ignoring swipe fees for simplicity sake)
Now consider a transactor who always PIF. They're guaranteed a 2% ROI (or whatever they set their swipe fees at), and wouldn't have to worry nearly as much whether they'll recoup their principal.
Everything else being equal, with the transactor you're guaranteed an instant 2% profit, whereas with the perpetual monthly minimum revolver you'd have to wait 3 years before you start seeing profits. And if they stopped paying at any time before that, you instantly go into the red.
Obviously these are two opposite ends of the spectrum, and there's a happy medium somewhere in between where profitability to risk ratio hits a maximum. With these consumers you won't get as much interest charges out of them, but the risk of you losing your principal is also exponentially lower, hence "prime revolvers", and the existence of scores and complex algorithms to try and find that tipping point.
@iv wrote:@arkane wrote:If I had to guess, I'd probably be worse than a deadbeat on a revenue score. Not only do I PIF, but I also PTZ before the statement cuts so they can't even count on me accidentally forgetting to pay once in a blue moon and charge me late fees.
And on rewards cards, hitting category spending whenever possible, I assume?
Yeah, you're not a big profit source. If you're really on top of the categories, you might be costing them more than they make from your swipe fees.
Of course... you do realize that the only reason people like you (and me...) can play those games, and make a profit for ourselves from regular daily transactions... is the behavior of the poorly-informed (or "trapped") customers who do pay all that interest, fees, etc. That's the real source of the profit we make from rewards cards - the bank is basically just passing us part of the profits from the suckers...
I do actually feel bad about that sometimes. Doesn't stop me from using the rewards cards, though.
I'm almost certainly a negative ROI with every bank (especially Discover) I do business with since I'm guaranteed 1.5% cash back even in non-category spend.
I do not feel bad about it in the slightest. Yes it sucks that the poorly informed pay through their nose in interest and fees, but finances are a personal responsibility. Everything you ever need to know about credit cards (ok fine, 95% of the important stuff) could be learned from these very forums in about a week or two, maybe a month tops if you wanted to deep dive into the nitty-gritty.
I will say though I am definitely lucky to have grown up in relative poverty until about the age of 15. That experience really taught me the importance of living below one's means, and that nothing is handed out to you for free. I'm also really fortunate my parents set a great example for me and kept the same minimalist lifestyle even as life got progressively better in later years.