Fair Isaac Corporation has this economy in a stranglehold. FICO credit scoring models are the problem. It is absolutely insane that a corporation that manufactures nothing has this kind of power and the government is clueless about it.
Let’s suppose that 5 million Americans have lost their jobs over the last 6 months. Let’s also suppose that each of them had 3 lines of credit: mortgages, bank-cards, and auto loans. (5 million x 3 = 15M) When one suffers a loss of income, those 3 lines of credit are in immediate jeopardy because the consumer might not be able to make all payments faithfully. If the consumer, with perfect, good, or marginally okay credit misses one payment and goes 30 days past due, he or she will take an immediate, 50-100 hit on their FICO score. So, what used to be a 750 FICO score could now be 650, which is the difference between prime and sub-prime.
Let’s suppose that two lines of credit go to 60 days past due……it does not really matter anymore because the hit on ones credit will be 5-25 points. With FICO, the first cut is the deepest = you’re fucked. You might as well default on all of your loans, which is what many people do.
The single most useful instrument in reviving the economy will be the revision of credit scoring models. You cannot apply the same standards in ‘catastrophic’ economic conditions as applied when the economy was robust and healthy.
The economy is fucked up. Home builders would like to sell their new homes. Automobile manufacturers would like to sell their new cars and I believe many consumers have a desire to make these purchases.
Unless and until credit scoring models are revised and updated to reflect current economic conditions, the economy will suffer = consumers won’t make purchases because they have been blacklisted/shut out of the credit granting/approval process.
Revise/Update/Mandate fair credit scoring that reflects the times in which we live. It won’t cost a penny, but it will save the economy.
When I arrived in the US, I had no debt whatsoever, a very good salary, and couldn’t get a credit card anywhere (which was needed to get some credit score to buy a home, or a car)…except a secured credit card where I’d be paying off interests on borrowing…my own money…I don’t think so!
I think credit scores have relevance because they are the gauge by which banks/lenders approve/deny credit applications.
But I agree with you…especially these days, that credit scores are stupid.
Many individual citiizens of our great nation are falling upon hard times. There are mechanisms in place (FICO scores) to punish them for their misfortune (late payments). However, most of the banks that hold the loans/notes for these folks received billions in bailout money from the Feds, but refuse to pass it along to help their customers to restructure their debt. (Note that there are no instruments (FICO Scores) in place to punish greedy, banks/financial institutions)
Again, fair credit modeling/scoring is key to invigorating the economy.
so what you are saying is that given that more people fall behind on their loans and default on their payments we have to revise the credit rating formulas in order to adhere to a Bell curve or some other deisred statistical order so that an equal amount of people still have “good” credit rating despite their increased risk of default?
I’m not saying that the credit rating system is “good” or “bad” and it certainly has shortcomings but I’m not sure I understand?
People are not buying not because of lack of credit but because they don’t know if they will have a job in 3 months AND why buy now when likely things are going to get cheaper
besides, wasn’t lax credit partly how we got into this mess
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To build on what Lorenzo said…there is a lack of trust and confidence. And a whole lot of shitty regulations like mark to market…but don’t worry, deflation will not last forever…we are going for some major inflation, no way we do not have inflation with all the $$ being pumped into the systems. Sooner or later it will hit and when it does watch out…
I am saying that the credit rating system implemented by FICO is fundamentally unfair and outdated.
If there are still folks out there that still have excellent/good credit in this economy, they should be rewarded with low interest loans, etc and all the perks that come along with pristine credit. Good fortune and accomplishment should never be punished….they should be rewarded
My thoughts are with the less fortunate……those who have suffered job losses and other hardships. Re-invigorating the economy will depend upon getting more people into the game. Maintaining out-dated, antiquated barriers is the antithesis of growth.
Current credit scoring models keep many/most people out of the game. The fact that Fair Isaac operates with no oversight is obscene……yet they are able to determine the direction of the economy…?
"My thoughts are with the less fortunate……those who have suffered job losses and other hardships. Re-invigorating the economy will depend upon getting more people into the game. Maintaining out-dated, antiquated barriers is the antithesis of growth. "
Why should somebody that is at a higher risk of defaulting on future and current credit have a higher score just so they can qualify for additional credit? You’re taking the same approach as the government, trying to solve a spending/credit problem with more spending and more credit.
There are bridge loans for those that have temporary hardships. Sure, it won’t be at a prime rate but nobody forces anybody to take a loan. The terms of the loan are what both parties (or the market comprising of all parties) decide is fair. Remember, both parties have to agree to an economic transaction, unless of course it is being forced upon by government interference regulations.
You have to ask yourself if you want to “re-invigorate” the economy for short term stimuli or for long term stability and real growth. Grenspan and the Fed had already decided that they’d rather avert a recession (2002) by infusing huge amount of credit into the markets and the increased lending as a result allowed us to escape from a recession but left us with an even more problematic outlook as the US economy became even more dependent on artificial unsustainable spending and wealth. You can’t do that indefinitely as there are consequences for those types of irresponsible policies.
I would add that as credit tightens many lenders have reduced credit limits for even the credit worthy which drives up credit ratios and sends FICO scores lower without any missed payments. Then other lenders see the decrease in FICO and raise interest rates on their current debt making matters even worse.
Wasn’t it easy credit that got us in this mess in the first place? And you want to make it easy again? Isn’t that just kicking the problem down the road some more? (Every other solution is also advocating delaying the inevitable, IMO).
thanks for mentioning that. It was intended to be a part of my rant;
Imagine yourself as a loyal Bank of Aneruca/Chase/Citibank customer. …
You’ve got $1000 outstanding against a $20K credit limit on your Visa card.
you get a letter from the bank which says they’re drawing down your credit limit to $10K…which hammers your FICO score even though you’ve never been late on any payments. To add insult to injury, they just took $1 Billion in TARP money.
I’m not seeing any justice in this or any other scenario. I see banks leeching off the Feds…who then go on to screw their customers…someone help me understand…
“My thoughts are with the less fortunate……those who have suffered job losses and other hardships. Re-invigorating the economy will depend upon getting more people into the game. Maintaining out-dated, antiquated barriers is the antithesis of growth”
Are you suggesting that this crisis, in large part caused by lax lending standards and too much credit, can be fixed by loosening lending standards further and providing even more credit? That’s fine if you are, but if you could elaborate a little bit more on how this would work?
I’ve never understood the “fighting fire with gasoline” theory but, if that is what you meant, you’re certainly not the only one to subscribe to it, in fact you’re in pretty good company (eg. the US government). I’d be very interested in reading why you think it would / will work.
Cheers
As an aside, I wouldn’t get too worked up about it because the US government seems to be working very hard (at least they say they are) at giving uncreditworthy people more credit to help them spend more money they don’t have and can’t pay back (“we have to get the lines of credit flowing”).
The FICO score is just a measure of risk from past history of managing credit of a person. It is the banks that actually look at that information and decide that someone should or should not get a loan. I see the use of a FICO score. And as an aside, they do manufacture something: information. I’m stating the obvious but the reason why people and businesses can’t get credit now is because of all the fast and loose credit that was being extended over the last 5 years. This is an overreaction on the part of the lenders and unfortunately, they are just hurting themselves as well as the rest of this country by doing this overreaction. And I agree that it sucks that people with immaculate credit are getting turned down where they should be rewarded with low interest loans and credit if they need it.
Imagine yourself as a loyal Bank of Aneruca/Chase/Citibank customer. …
You’ve got $1000 outstanding against a $20K credit limit on your Visa card.
you get a letter from the bank which says they’re drawing down your credit limit to $10K…which hammers your FICO score even though you’ve never been late on any payments. To add insult to injury, they just took $1 Billion in TARP money.
That scenario is incorrect. Looking at just this account and not looking at any other accounts, this person has a debt-to-credit ratio of 5% ($1k used on $20k). If their credit limit was cut to $10k, then their ration goes to 10%. According to the FICO algorithm, having a debt-to-credit ratio of 10% is not bad at all. 5% is better obviously, but 10% isn't bad. It is generally known that having ratios over 30% are bad and then over 50% is worse. At these levels is where FICO starts dinging your score mildly and it is nowhere near "hammering it". They look at both individual cards as well as overall credit. So, if you had one card that was at 60% but your overall credit ratio was 15%, you would get dinged slightly for the 60% card but not dinged as much for the 15% overall.
When I arrived in the US, I had no debt whatsoever, a very good salary, and couldn’t get a credit card anywhere (which was needed to get some credit score to buy a home, or a car)…except a secured credit card where I’d be paying off interests on borrowing…my own money…I don’t think so!
Once again, it isn’t FICO that is causing this asinine issue. It is the lenders that are using the FICO information to make asinine decisions. And I agree that there is some kind of fallacy in the fact that you need credit to get more credit. It’s kind of like you need experience to get a job, but you can’t get experience unless you have a job.
“If there are still folks out there that still have excellent/good credit in this economy, they should be rewarded with low interest loans, etc and all the perks that come along with pristine credit. Good fortune and accomplishment should never be punished….they should be rewarded”
I’ve never understood the mindset that works to make it more difficult for higher risk people to pay. Interest rates on all loans of the same type from the same institution should be the same. The only difference is that higher risk people would qualify only for an amount that is within their ability to repay. Allowing higher risk people to have more credit than is justified, and then making them pay higher interest on top of that is a poor business practice and is a big reason for the financial crisis.
Another problem is allowing terms of loans regarding interest rates to change. All loans should have a fixed rate from the time of the loan, until the balance is paid. Again, allowing interest rates to rise on existing debt when a person falls on hard times is a poor business practice that makes the chances of default much greater.
I know a person who applied for and received credit from all the companies who are constantly sending applications in the mail. Over the course of a few years this person had amassed over $300,000 in available credit even though this person never earned more than $30,000. This person also had a mortgage and car loan. WTF is the justification for allowing a person like this to have so much available credit? Whether or not this person ever used the credit is not the issue - it never should have been made available.
Anyway, credit scores should only be used as a method to help determine how much credit a person can have, not as an instrument to determine punitive rates.
