by Joseph Weisenthal

Financial Institutions Start To Turn On The Almighty FICO

from the how-does-the-fico-score-score? dept

If you wanted to get a truly accurate picture of an individual's creditworthiness, you'd want to include factors like salary, past payment history, career risk, health risk, family situation and so on. But for the most part, the lending market operates on the assumption that a single numerical score, the FICO score, can adequately synthesize all of the relevant data into a useful indicator for lenders. However, the recent breakdown of the subprime mortgage market has some market participants wondering whether the FICO score is becoming irrelevant. Certainly, it did an inadequate job of anticipating default rates among borrowers on the low end of the spectrum. Critics are also pointing out that the system has only been used by mortgage lenders since the 90s, during which housing prices have steadily grown along with the economy. Thus, the system hasn't been tested during a period of slumping housing prices and significant economic weakness. Already, we've seen new services spring up that try to give more detailed information on the reliability of a borrower or renter, in an attempt to break the stranglehold on the market held by the credit reporting agencies. If banks and other lenders continue to grow dissatisfied by the FICO system, it's likely that more alternative institutions will emerge.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    discojohnson, Jun 13th, 2007 @ 10:54am


    it's about motherloving time. i think the whole thing is a piece of shit system that completely removes the humanism from reality. i liked it before when i could go to the bank and ask for a loan and they'd loan based on me, not a seemingly arbitrary (well, closed system)number. rental places don't put much basis on your credit history, just you salary

    reply to this | link to this | view in thread ]

  2. identicon
    Anonymous, Jun 13th, 2007 @ 11:26am

    GOOD! The FICO score has become the equivalent of a 7 year jail term. Individuals such as myself with 6 figure salaries run into ridiculous barriers due to very manageable activities - such as purchasing multiple properties, or even worse, incorrect information on my credit report. My income to debt ratio is fine, yet I would be made to pay a larger interest rate due to my FICO score? Luckily for me, I don't have to. Unfortunately for the lending instituations, they lose my business.

    reply to this | link to this | view in thread ]

  3. identicon
    Brian, Jun 13th, 2007 @ 11:31am

    Your FICO as Extortion

    I've always felt that your credit score/FICO was just a big extortion scheme that allows the lender to jack rates skyhigh. I've got decent (but not exceptional) credit and I just recently applied for my first mortgage. I was approved, but, when I looked at my 3 credit scores the highest and lowest were 40 points apart and all three said "excessive delinquint accounts". That shocked me cause I've never been delinquint. When it was looked into, I had 3 late (under 30 days) payments--one in 1992, 2000, and 2002--all periods when I spent alot of time deploying to various parts of the world with no one to watch over my financial well being.

    reply to this | link to this | view in thread ]

  4. identicon
    Overcast, Jun 13th, 2007 @ 11:36am

    My credit number is low... because I've had issues with certain agencies and wasn't so responsible at at a younger age.

    However; I haven't been late - even a day - on my rent payment for 4 years. My family and job are stable. I know personally I would be almost no risk to a lender, as I will pay the house payment first and foremost..

    I've seen people with 'better' credit ratings get foreclosed on - they might pay their credit cards just fine, but they over-tax their income so much they end up not being able to afford any of it. I'm very cautious about any credit I take on. The way I look at it... screw FICO, screw the banks, I'm saving... and I'll pay cash~

    reply to this | link to this | view in thread ]

  5. identicon
    Xerloq, Jun 13th, 2007 @ 11:55am

    Going in a handbasket

    Talk about a nightmare! It's already difficult enough managing credit reports from three agencies (actually four, but let's not go there) to make sure your credit information is spit-and-polish.

    I don't think Fair Isaac is to blame. The FICO score was meant to be a service to lenders to *assist* in the evaluation of creditworthiness. The underlying issues are with creditors and the credit reporting agencies. I believe the recent decline in the sub-prime lending market is due to the obscene ease with which anyone can receive credit. Many people may not understand all the terms and conditions of that credit. They also may have over estimated their ability to pay debts.

    TransUnion, Experian and Equifax each have their own 1,000 point scale, while the FICO maxes out at 850. Imagine a person who obtains one of the other three credit scores around 700 thinking it's the FICO score? They estimate themselves to have excellent credit and take on a few hundred-grand more than they should when their actual FICO score is 595, good-but-not-excellent credit?

    Jeez, people, pick a standard and stick with it - otherwise all of the systems will fail and we'll be stuck providing 7-years worth of financial statements to the bank each time we get loans. You think the paperwork is bad now?

    reply to this | link to this | view in thread ]

  6. identicon
    Anonymous, Jun 13th, 2007 @ 12:00pm

    Re: Your FICO as Extortion

    When the payment is due, it's due. Few lenders offer 30-day grace periods. I saw one with a 13 day grace period! You also gotta be careful 'cos many will specify the time of day the payment has to be received. Grace period is over on the 5th at noon and you get it there at 12:01 on the 5th - delinquent.

    reply to this | link to this | view in thread ]

  7. identicon
    Brian, Jun 13th, 2007 @ 12:17pm

    Re: Re: Your FICO as Extortion

    Got that brother and I agree, but, when you're deployed to Afghanistan or Saudi Arabia or somewhere else, it makes things difficult. I would think they would have a little heart for the folks overseas fighting to give them the freedom they enjoy and use to extort us...then again...forget it.

    reply to this | link to this | view in thread ]

  8. identicon
    ficounderstood, Jun 13th, 2007 @ 12:23pm

    FICO scores don't "predict" anything.

    They are merely used to establish the interest rate one would have to charge someone to make lending to them an attractive proposition given the risk one takes when lending money.

    The lower the score ... the higher the interest rate (theoretically because the lower the score, the more risk the lender is assuming.) You can have a FICO score of 780 and get a 5% interest rate, but you can also get a loan with a FICO score of 2 ... provided you're willing to pay 3 billion percent interest.

    If a bank, however, lends money to people with no income verification, no down payment, no requirement even that you be a citizen of the United States, I can pretty much guarantee you that bank's ratio of loan defaults is going to increase.

    reply to this | link to this | view in thread ]

  9. identicon
    Chuck Norris' Enemy (deceased), Jun 13th, 2007 @ 12:59pm

    Random FICO

    I went over my FICO statement with an expert. I have a pretty good credit rating and was looking over how I had lost points in certain catagories. There was almost always points taken off for some reason that in the desctriptor made no sense. When I asked the expert he said that really I did nothing but they like to add things so your credit score isn't perfect. After that, my confidence in the FICO system went way up!

    reply to this | link to this | view in thread ]

  10. identicon
    Will Everly, Jun 13th, 2007 @ 1:19pm

    Fico Snafus

    This illustrates what happens when a model is used to predict risk when many of the elements of the controlling model have not been previously subject to market and economic stress.

    Credit scores are only a tool and should not be such a determining factor in anything. The data can be manipulated mathmatically due to variances and standard fluctuations.

    reply to this | link to this | view in thread ]

  11. identicon
    Will Everly, Jun 13th, 2007 @ 1:21pm

    Fico Snafus

    This illustrates what happens when a model is used to predict risk when many of the elements of the controlling model have not been previously subject to market and economic stress.

    Credit scores are only a tool and should not be such a determining factor in anything. The data can be manipulated mathmatically due to variances and standard fluctuations.

    reply to this | link to this | view in thread ]

  12. identicon
    Sanguine Dream, Jun 13th, 2007 @ 2:26pm

    About time...

    I've always thought that FICO was a bunch of nonsense. How in the world can a simple 3-digit number show how reliable you are when it comes to credit? Just like commentor #1 said the FICO system seems to be a lazy way for a lender to instantly tell if you are trustworthy.

    The big problem is that any attempt at reforming the system would be bogged down by lobbying(read:bribe) efforts by the benefit from such a jacked up system. And who benefits from such a system you ask? Why that would be the upper class elite.

    reply to this | link to this | view in thread ]

  13. identicon
    Lord, Jun 13th, 2007 @ 3:37pm

    They have only themselves to blame. If they don't like the results maybe they should look in the mirror.

    reply to this | link to this | view in thread ]

  14. identicon
    markusfarkus, Jun 14th, 2007 @ 11:43am

    Against the score anyway

    Personally I am totally against any scoring system. I don't remember giving anyone the right to track and record what I do and my financial history. What is worse is if the score gets lowered because of fraud it is almost impossible to get that reconciled. Perhaps they could just drop all of that crazy crap.

    reply to this | link to this | view in thread ]

  15. identicon
    Will Everly, Apr 10th, 2008 @ 12:19am

    Fico Snafus X10

    Here we are nearly a year later and Fico scores have became more of a penalty assessment over a risk model. For example, if a lender of any kind wants to accept a higher Fico Score over a full credit, asset and income package, then they need to own up to the risk they accepted rather than pass the risk off to the secondary market and then claim that market conditions caused an increased risk over the credit risks.

    Over valuation and increasing interest rates and predatory lending practices have done more harm than any FICO or other scoring model could ever imagine doing.

    reply to this | link to this | view in thread ]

  16. identicon
    Darla Williams, Jun 2nd, 2008 @ 6:50am

    FICO and the Mortgage Industry

    I agree with FICO Snafus X10....I work in the Mortgage Industry, and I'm saddened by the number of Good People that have been penalized due to the FICO scores. To say they don't discriminate is simple rhetoric. If you don't "play the system" the way they designed it, then not only will your 30-year long term mortgage be affected, but also your Insurance (since they've jumped on the band-wagon), your employer also looks at the score now. I recently pulled the credit of an individual with 6-figure income, his debt-to-income ratio was only 25%, no late payments (ever) on his credit, owned the home for over 6 years with no late payments, but suddenly his credit score is 613 because of a bathroom remodel, and I can't do the loan because none of the Private Mortgage Insurance companies will insure an 85% Loan-to-Value loan with a borrower that has a credit score below 620. Forget the basic credit criteria, this man fell victim to the Adjustable-Rate Mortgage fiasco 2 years ago, and is now paying $700/mo more in Principal and Interest. It's time we all wrote to Congress, Senate, etc and expressed our views on what is WRONG WITH THE FICO system of determining risk. I can't find a single article or study that can provide a direct correlation between the FICO scores and the default rate on Mortgages. Does anyone know whether such a study exists? The studies I'm seeing say it's more a correlation of the Poor receiving 100% LTV mortgages and States with Job Losses or that had increases in Real Estate Values that far exceeded anything in the past.

    reply to this | link to this | view in thread ]

  17. identicon
    Jen M, Jun 17th, 2008 @ 1:05pm

    FICO and the Mortgage industry

    This would be the best change since greening the workplace. It is about time that we initiate trends geared to improving our lot in life instead of destroying it. The FICO system is so arbitrary and not streamlined amonngst the four reporting systems. They all rate your financial decisions differently. One is happy you bought a house because you're paying on time, the other is unhappy because now your ratios are out of whack...it doesn't make any sense. I find it sad that we have to remind ourselves to be humanists in the wake of disaster...why do people have to lose their homes for Big business to wake up? I guess, because they lost in all of this as well and unfortunately, that is when the tipping point occurs.

    reply to this | link to this | view in thread ]

  18. identicon
    Syn W, Jan 9th, 2009 @ 6:58pm

    FICO and Mortgage Industry

    My husband and I have decided to pay off all of our debt by 2016, which includes our mortgage. I think that this country needs to "do away" with the FICO system. If this system wasn't created then I think this country would be in better standings. Also, they need to crack down on the mortage companies. Example, my mortgage was for $172500 but if I pay it over 30 yrs then the morgage company would get an additional $300,000 from me. Why should I line the pockets of the CEO? We plan on paying off this mortgage in 6-7 yrs by using the John Cummetta's system, Debt to Wealth. After listening to way he says on his CD's it makes a lot of sense. So, I look at it this way, pay off my $4800 credit card debt by or before Aug. 2009, $6700 home equity loan-Apr. 2010; $27,260 car loan by Apr. 2011; $170,200 mortage by Aug. 2015. And after we pay all of this off..."it will be CASH only purchases." STOP making the credit card companies, banks and mortage lenders RICH...keep that money for yourself.

    reply to this | link to this | view in thread ]

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