Musings on credit scoring - LO

Discussion in 'Credit Talk' started by marci, Jan 24, 2001.

  1. marci

    marci Well-Known Member

    Hi all,

    I have been thinking about this whole credit scoring issue for a while attempting to weigh it's benefits and drawbacks. I'm interested in what others may think of the whole "philosophy" of credit scoring, so feel free to post your own opinions of how beneficial or detrimental credit scoring is.

    Benefits of credit scoring:

    1. If I were a lender (or an investor) I would like to be able to assess the risk of loaning my money out, and would welcome a "consistent" mathematical model that could predict the ability or willingness of a potential borrower to pay back.

    2. I very much like the fact that automated scoring and underwriting prevents credit/loan discrimination based on ethnicity, gender, or "class". I think that automated underwriting has tremendously helped many Americans who would have otherwise fallen victim to various forms of "redlining".


    1. While I think a computer model can be used *as one factor* in the credit decision to predict ability to pay back, I oject to the use of a computer model that is both secret and seriously flawed in many ways. The formula ought to be made public - period. FICO states that if the formula or scores are released, then people may find ways to "manipulate" the system. My response is that if the scoring model was working properly in the first place, then the only way people could "manipulate" their score would be to pay bills on time, seek credit minimally, and stay well within their limits - which is what any thinking lender would want to see in the first place. I suspect FICO is afraid that people can change their score by taking advantage of some flaws in the model, which means that FICO, as written on another board, has sold America a "defective product".

    2. The current model does not reward "paid charge-offs/collections" with higher points than unpaid ones, and I think that should be changed. The current model encourages people to do BK or ignore valid debts. Had I known earlier what I know now, I may have been seriously tempted to walk away from my debts or file BK. But I paid my delinquent debts as soon as I could in full, and the scoring model treats me no differently than someone who walked away without paying. All this from a model that is supposed to predict the ability or willingness of a borrower to pay back.

    3. The current model does not rate the number of charge-offs/collections on a report, so that one charge-off is a bad as 10 charge-offs.I remember Kristi F. once saying she had two clients who had the same score even though one had a few collections for a few hundred dollars and the other had 70 collections for several thousand. Supposedly NextGen Scoring will change that.

    That's all I can think of for now. Any thoughts?

  2. creditwork

    creditwork Well-Known Member

    RE: Musings on credit scoring

    Interesting. In my opinion FICO is overrated both by the lender and the borrower. I am not the only person posting on this board with a tremendous amount of credit. I doubt very much that this credit was built with any accuracy on the part of the credit scoring system. Manage whatever credit you do have properly and with patience and discipline you can build your credit to unbelievable levels. I have never earned more than $52,000/year, yet I have built my bank credit card limits to at one time more than $150,000.
  3. marci

    marci Well-Known Member

    RE: Musings on credit scoring

    One more detriment:

    3. Credit scoring, IMO, should NEVER, NEVER, NEVER be used for "pre-pay" non-credit business. I think car insurance companies should not be allowed to grant or deny insurance or rates based on credit scores. I do not think that rental properties should use a credit score to accept or deny tenants (though I am in favor of landlords looking at credit reports manually to see how the persona manages bills.)

    Any more thoughts?
  4. marci

    marci Well-Known Member

    RE: Musings on credit scoring

    >In my opinion FICO is overrated both by the lender and the borrower.

    I agree that *current* credit scoring is overrated by the lender and the consumer. I don't mind credit scoring as a principle, but I *do* mind a model that doesn't work and that is so secret that no one can figure out why it doesn't work.

    And I do mind underwriting that is solely based on a score and treats is as the final yes/no.

    GEORGE Well-Known Member

    RE: Musings on credit scoring

    JUST MY OPINION...Insurance companies should not be able to access your credit report EVER, since they get paid up front before coverage starts...

  6. Momof3

    Momof3 Well-Known Member

    RE: Musings on credit scoring

    Great Points Marci, I have the same feelings towards the whole scoring system. And I agree whole heartedly that we as the consumers should know our scores, I also believe as you stated that their "has" to be a change in regards to paid/unpaid, yes consumers who do have collections should be considered a higher risk that those that don't, BUT a consumer that does the right thing and pays their collections should be given a little more credit than those that don't pay it at all. I also find it ironic that the scoring system seems to favor some people that do file BK, I started building credit over 2 years ago, which I do realize that I don't have much history showing my pay billing and managing skills, yet I do know others who have filed BK three years ago and seem to get better offers and rates than me and that doesn't make a bit of sense to me. And finally and someone put it earlier what does my credit have to do with how I drive my car!! If you don't pay your insurance you lose it, end of story.

  7. John Shimm

    John Shimm Guest

    RE: Musings on credit scoring

    My opinions on this matter are mixed.

    Credit Scoring in General: I think it is a good thing. I think that most (not all) of the people who DISLIKE credit scoring are those with low scores due to mismanaged credit. Years ago, I was in the mid 500's, but that was due to my own mismanagement - I took full responsibility, blamed no one but myself, and spent many years without credit (deservedly so), and several years repairing the factors that affected my risk. To this day, I do not blame Fair, Issac for my low scores back then - I blame myself. Today, after hard work and years of zero credit, I am in the low 700's. Should I give Fair, Issac credit for that?

    Another reason I like scoring is because it gives me access to instant credit. Not that I need it (I have $30K of credit limits on three cards alone), but if a store is offering a discount IF you open up their card, I can open the card and immediately get the discount, then pay it off (or transfer it if you don't have the cash) and close the account all within a week's time. You couldn't do that without credit scoring.

    Although I don't agree that FI must reveal the formula, I do believe that every consumer has a right to know what their scores are at any time. Just like you can get your history, you should be able to see what your scores are BEFORE you apply for something.

    Sure, incorrect info can get into your histories, but everyone should be proactive enough to keep thier histories in line. Ford doesn't call you every week to tell you to change your oil, check your tires, change the spark plugs, etc. I, personally, don't mind spending $75 or so a year to get all my credit reports 3 times to make sure everything is in line. With today's technologies, we already know you can get two of the three reports online, for free. If you're not willing to be proactive, then you must not care enough about your credit risk.

    When a creditor reports something, how is the CRA supposed to verify it BEFORE it goes on your history? Their source for verification is THE VERY CREDITOR that put it on there. If they were ordered to report to the consumer EVERY time something changed on a consumer report, everybody with a negative item would ALWAYS say, "Oh, no, that CAN'T be right", and the CRA would do 10 times the work, which means credit reports would cost 10 times as much. I'd rather spend $75 a year per my own initiative, instead of $75 for a single report.

    Credit Reports for Auto Insurance: I'm mixed on that one, but if you happened to have taken even a semster of Statistics in college, you'd understand that there *IS* rhyme to their reason. An accurate study of statistics is correct more times than not.

    If you run the numbers, and if the numbers say that people with higher credit scores are less prone to be involved in automobile accidents, then it makes sense to use the scoring. Are they saying that people with lower scores CAUSE more accidents? No, not at all. It's a ratio comparision, that's all. They could use other 'scores', but the most readily available source of data is housed at the CRA's.
    Believe me, if statistical analysis proved that those with higher scores were MORE prone to file claims, they'd be paying more for their insurance.

    IMHO, those who manage thier credit wisely are more likely to manage their driving better, more likely to keep the house painted and orderly, more likely to be to work on time, etc.

    I'm sure some will disagree, but remember -- this is an opinion board ... :)

    GEORGE Well-Known Member

    RE: Musings on credit scoring

    NEVER had an accident...ONE TICKET 7 MPH OVER (the people that were passing me up like I was standing still were too hard to chase)


    BUT I have been denied credit 4 times in 6 months...

  9. Mephisto's

    Mephisto's Guest

    RE: Musings on credit scoring


    I'll admit up front that I am one of the bad guys here. I work for an insurance company that uses scoring.

    If you really want to know why insurance comapnies like scoring, there is a document available to the public at It's the only public document I've ever seen that goes into detail about how a type of credit scoring works, and provides numbers to back up the words.

    You said that you had been denied credit 4 times in the past 6 months. What, at a minimum, that probably means you racked up 4 hard inquiries?

    On page 85 (the 7th page of the file), if those numbers are to be believed, people with 4 inquries cost an insurance company (all other things being equal, already considering driving records etc) 12% more than people with 0 inquiries.

    Add in other credit variables and how they correlate to the losses an insurance company pays out, and it's pretty difficult for an insurance company to pass up credit as a tool. If an insurance company can find a way to offer lower rates to people who have fewer losses, it's going to do so. And, if an insurance company can find a way to charge people who have more losses a higher premium....

    Or to look at it from another direction -- if you looked like a person who was not likely to file a claim, would you want to pay more than the insurance company thought it would need to cover your expected losses, just to help pay for claims filed by people who are riskier than just their driving records indicate?
  10. steve

    steve Well-Known Member

    RE: Musings on credit scoring

    Your point about scoring paid chargoffs the same as outstanding chargeoffs is good. The way Equifax does it obscures the truth of whether or not a debt was or is current. Once you reach 120+ days past due or have a defaulted loan, you are graded at 120+ days past due for at least 7.5 years. The way the put it is "I5" means you either are or were 120+ days past due as of the last date reported. That is total B.S. I mean, how is FICO supposed to know what the current status is? FICO can't unless it somehow cross-references the balance (zero). But, it could be a charge-off, so that doesn't really work either. This violates the requirement to update status under the FCRA. So, I'm not sure this problem is a credit scoring module problem. I think it is a direct violation of FCRA laws and a deceptive means to assign a lower rating to consumers. Specifically, Equifax herein involves itself in credit scoring rather than just providing raw information.
  11. GEORGE

    GEORGE Well-Known Member

    RE: Musings on credit scoring

  12. GEORGE

    GEORGE Well-Known Member

    RE: Musings on credit scoring


    "There still is insufficient data to prove to all regulators' satisfaction whether credit
    history ... are or are not valid indicators...
    They ask whether a person's credit history
    is truly correlated with future loss experience or whether it is a spurious correlation?
  13. mj

    mj Well-Known Member

    RE: Musings on credit scoring

    Nice points all.

    1) Re: insurance -- it's not about your driving record (what about life insurance??) -- it's about your overall "character." Not how good you drive, but how (empirically) likely you are to file (or cause to be filed) a claim. I can see a corelation- not as direct as "you were 90 days late on xxx card 2 years ago, ergo you are more likely to be late on a new card" but more along the lines of "reckless with credit ... reckless with "

    2) Remember the old "investigative consumer reports" where they'd interview neighbors and coworkers? I'll take scoring over that, thank you.

    3) FICO doesn't want everyone to know their scores because it makes reverse engineering much easier. Once FICO scores are public, the folks from iplace etc. will have a TON of data on file to then attempt to reverse engineer. Why do you think FICO has introduced so MANY new models? It's an ailing monopoly gasping.

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