flawed FICO scoring system

[Anonymous]

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.

[Anonymous]

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. 

[Anonymous]

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

[Thomas_Thumb]

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

[SouthJamaica]

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@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.

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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.

[Aahz]

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.

[CreditMagic7]

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.

[Anonymous]

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.

[Revelate]

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@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.

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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

[Anonymous]

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.