The REASON for credit scoring

Discussion in 'Credit Talk' started by PsychDoc, Nov 3, 2001.

  1. PsychDoc

    PsychDoc Well-Known Member

    I often read one resentful post or another about how terrible it is to use credit scoring. Even Greg Fisher's ( objections to credit scoring aren't based on the basic principle itself. Rather, his objections have more to do with the secrecy imposed regarding the formulas, the lack of information provided to consumers who wish to work for higher scores, and -- before the CRAs began releasing them -- the impossibility of acquiring them.

    Credit scoring was an attempt to remove issues like RACE, GENDER, and SOCIO-ECONOMIC STATUS (a.k.a., income) from an overall assessment of every consumer's credit report. Back in the Good Old Days (anybody here remember life before 1970 when the FCRA was first enacted?), a typical Equifax report included such things as whether you were black or white, Protestant or Jewish or atheist, rich or middle-class, whether your neighbors thought you were an alcoholic, interviews with ex-spouses, and whatever else they could find. Equifax in particular had a working relationship (and largely funded) Welcome Wagon. Those nice little ladies who drove up with coupons back in 1968 would sit in your house with your family for an hour, observe everything they could, and then turn in a written description of your behavior to headquarters. The FCRA made a distinction between "investigative consumer reports" (Welcome Wagon; ex-wife stuff regarding your moral character; etc.) and the kinds of consumer reports we now accept as the norm. Needless to say, when you apply for a mortgage nowadays, your banker no longer gets to review a potentially embarassing dossier to which you don't have access. CREDIT SCORING was a statistical attempt to consider everyone's credit history under the same criteria -- in a manner that was beauty-blind, handicapped-blind, color-blind, and blind to social status.

    Yes, it's very true that bankers once denied credit to those whose appearance just didn't fit their idea of what defined a good human being. You could be denied because the loan officer thought you looked strange. Or because you were overweight (and, in his mind, therefore lazy or whatever other stereotype was in fashion at the time). Or because you were Black. Or had long hair. Or handicapped (so surely couldn't generate income, right?). Some here may remember (or have parents who remember) when it seemed so uncanny that bankers would routinely deny the applications of Black applicants even before meeting the applicants! (Thank you for that old "race status" remark, Equifax, now relegated to our collective hall of shame.)

    While it's true that there are flaws with credit scoring, I don't agree that the concept itself is bad. Nor do I believe that this system is INFERIOR to the way things used to be. Are there terrible flaws? Yes! Do they need to open up the formulas so we can know precisely -- along with everybody else on an equal footing -- just what makes up a score? Yes! Should there be a standard, government-issue format for determining scores? Yes! (Sorry, Fair Isaac Company.) But should scoring be replaced entirely by a system that dumps math and reinstates human judgment? Well, if human beings were always fair, maybe. But we can't be fair. Different evaluators would vary -- some would be tough, others easy. Some would be prejudiced against Arabs or Catholics or people from the north or whatever. Others wouldn't. Until the day arrives that our human foibles can be somehow eliminated from the picture, credit scoring (albeit, a REVISED system of credit scoring) is our best chance for fairness no matter who is applying.

  2. doodyhead

    doodyhead Well-Known Member

    Personally, I don't have a problem with credit scoring. Like the good Doc said, we need to know the formulas behind it - how can you play a game if you don't know the rules?
  3. roni

    roni Well-Known Member

    Whatever the reason you want to cite... Any model that fails to account for payment history is flawed... You could have a $80K CL but if you spend $79K per month and pay it all off it looks like you're a risk... What a joke!
  4. doodyhead

    doodyhead Well-Known Member

    yes it is seriously flawed isn't it?
  5. mj

    mj Well-Known Member

    Doc- well throught out and well put.

    To all who moan & groan about the unfairness of it all - you know what, if you don't like the game, take your ball and play in another court!

    Seriously - it's the CREDITORS who we should focus our displeasure on. What I mean by that is if you have a "unique" situation in that you spend $79k per month, wouldn't you be working with a lender who knew your entire financial picture (Amex, local bank, a private banking group, ?)

    (side trip -- lets see.. .that would be almost $1M/year in spending, so household income of around $1.7-$2M? C'mon - who needs credit at theat level!)

    Back to my point - I'm one of those "weird situations" - a BK that didn't include personal debt. My credit report looks very strange - it's perfect (no lates, low utilization, good mix), large payments, large limits, old accounts ... and one negative public record. Some companies auto-deny and will continue to do so until 2005. Their loss - Chase, Amex, Bank One (_NOT_ their First USA division), Citibank (Diners Club, _NOT_ the regular card division), Morgan Stanley, and some other fine companies that ARE able to look a little deeper at the whole picture and approve the application get my business... and make money. Those that don't lose out on the $ now-- and in the future (I have a VERY long memory).

    When I was in new accounts, "the system" could handle applications (in about 20 seconds) and decision them as "auto-approve", "auto-decline", or "manual decision needed".

    I worked on the "manual decision needed" applications - and it was very subjective, but you could pretty easily see (on 80% of the apps) who would pay and who wouldn't. On those that it wasn't so easy to see, I would talk to the applicant. Simple.

    Companies that don't take that extra step to look at the score as a TOOL and a PIECE OF THE DECISION PROCESS (not the whole thing) are short-sighted and will lose in the end. BUT... the overall benefits of scoring - the complete elimination of race, creed, gender, sexial orientation, marital status, age, etc. - from the credit decision process is a good thing.


    GEORGE Well-Known Member

    I HAD THAT PROBLEM WITH DISCOVERCARD ALL THE TIME...I may spend $10,000 in one month, but pay in full, the next month spend $8,000 paid in looked like I only paid $2,000 off, BUT I PAID IT IN FULL, then spent $8,000 more...
  7. G. Fisher

    G. Fisher Banned

    Don't you think the consumer's desire for quicker lending decisions with less paperwork played a part?
  8. PsychDoc

    PsychDoc Well-Known Member

    Perhaps, Greg, but I've never really considered money lenders to be particularly customer-centered unless it benefits them. Perhaps the customer acquisition race dictated increased efficiency, and that helped to drive the need for faster qualification processes. Interesting question.

  9. breeze

    breeze Well-Known Member

    What about the fact that many scoring models do include demographic data that also leads to discrimination?
  10. PsychDoc

    PsychDoc Well-Known Member

    Do tell, breeze! What kind of demographic data; and disclose the primary source -- I'd love to read about this. (I don't think they can legally use race or gender. "Length of credit history" can be used, and that might be considered ageist in some circles, but I'd argue against that.)

  11. bbauer

    bbauer Banned


    Many people do make that kind of money and never carry any on them. I think it was said of President Clinton that he never carried any money on him and always had to have one of his secret service protectors pay for his meal even when he stopped into a MacDonalds for a snack when out on a jog or something.

    You read a lot about very wealthy people who never carry any money on them. The very wealthy use far more credit than the average man does. They usually just use it in different ways.

    I'm certainly not among the very wealthy and my wallet is always full of credit cards. I've got so many that I can't even carry them all in my wallet at one time. I have to have a separate 3 ring notebook that has sheets of plastic business card holders in it full of more credit cards. Then when I go to a store I have to check to be sure I've got their credit card or one that they will accept in my wallet. But I usually can't find more than a few pennies in my pockets to rub together. If I'm going to a store that don't take credit cards I have to go to a 7-11 store and pull out $10 or $20, whatever I'm going to need. I carry 4 checkbooks with me, but I don't hardly ever write a check either. I don't even pay my employees with a check, I just pay them with direct deposit.
  12. breeze

    breeze Well-Known Member

    What influences my credit score and how?
    Nobody seems to know. Even the scoring companies claim they can't tell what influence a particular factor has on our scores. Congress has not required credit scoring source code to be published, nor even required companies to tell us where the data they looked at came from. Credit reports are the only exception and modern scoring systems are using far more information about us than can be found in credit reports alone. It is probable that marketing lists and shopping habits will have an increasing effect on your credit score. Some of the items that make up your score are obvious (your debt load) and some make as much sense as reading tea leaves (the model or year of the car you drive is common). In the end your entire existance is reduced to a single number that results in a "yes" or "no" answer. "Yes" results often get further study before you are accepted. "No" applicants are nearly always dropped from consideration without human intervention.

    Is it my score or my neighborhoods score?
    Ask your banker what factors most influence your credit score. You will hear the old chestnut about your payment history, your stability over time, your this and your that. A banker that says this is showing his/her ignorance. Few if any bankers or regulators really know what goes on in the computer scoring program. The dirty secret they don't share is that in recent years "your" conduct has meant less and less, and the conduct of people like you has meant more and more. One sign of this is when the banker refuses to request an updated score after you have "cleaned up" your credit. He knows "your" credit history may not even be a signifigant factor in the final score.
    A process called Market segmentation (outside link-any email address will work here) is what tells lenders about people like you. It started out as a simple tool to target mail ads to those who would be interested in buying a particular product. Over the years business started to use this valuable marketing tool as a type of scum filter, to screen out those whom they would rather not have in their neighborhood for whatever reason. Tools designed for advertising are now frequently misused as a brick wall to keep undesireables (like you perhaps) from entering the marketplace at all--regardless of ability or willingness to pay. Laziness, greed and and a desire to avoid the risks inherant in a free market cause many firms to misuse both credit scoring and marketing data.

    You have probably heard that scoring systems grade you on the likelyhood the loan will be paid back. This is only partially accurate. Modern decision/scoring systems are designed to find the most profitable customers--not the most reliable. The most profitable customer is not the one who regularly pays off the balance and knows her legal rights. No indeed. Banking profits come from overdraft charges, late payment fees and sky high interest on revolving balances. The profitable customer is deeply in debt and ashamed to challenge overcharges for fear of incurring the wrath of creditors. Scoring systems are designed to find customers who are in this trap and keep milking them, then dump the account just before the victim is forced into bankruptcy. Being an intelligent consumer and managing your money wisely will put your credit score in the dump. Spending so much that you have to borrow to survive will go a long way toward improving your credit score (and destroying your life).

    The future
    Get familiar with the phrase "Transactional Data". It is the data gathered about what products you buy when paying by credit/debit card or using an ID card of any kind. Retail outlets are collecting and using this information in ways you would not approve of. discussion groups and trade magazines are hinting that your bank (or paperboy) can already judge your worthiness based on what book titles you buy (King James versus New American) or what hair care products you use (Clairol versus AfroSheen). Many sheltered programmers in the scoring industry don't realize how far this trend has already gone, but it is apparent that what you buy does affect your ability to get credit. Want more? Here is just one firm (Deluxe check printers) that analyzes and sells your checking account information.
  13. breeze

    breeze Well-Known Member

    Credit scoring has not been proven to be without bias. Although lenders maintain that credit scoring removes bias from the lending process, Home Mortgage Disclosure Act data reveals that denial rates for minorities remain much higher than for non-minority borrowers. A contributing factor could be that low- and moderate-income borrowers often only have access to credit that has a higher risk rating in credit scoring models, such as finance company loans. Credit scoring does remove personal judgment from the loan process, but it substitutes statistical judgments that are made based on the behavior of prior customers. If those prior customers are not demographically representative of the current base of loan applicants, a credit scoring model might underestimate the likelihood of repayment by consumers whose demographics are not fully represented in the sample of prior customers upon which the scoring model was based.
  14. breeze

    breeze Well-Known Member

  15. lbrown59

    lbrown59 Well-Known Member

    to cheat the consumer:
  16. lbrown59

    lbrown59 Well-Known Member

    Scoring had nothing to do with this.
  17. lbrown59

    lbrown59 Well-Known Member

  18. GEORGE

    GEORGE Well-Known Member

  19. lbrown59

    lbrown59 Well-Known Member

    This is only one reason why the fico is a sham.and is cheating us out of MILLIONS of bucks a year.

    To make it clearer about about what a rip-off fico is take a look at what would happen if it were used in other industries.

    Example from auto industry
    over a given length of time Smith buys 5 $12000 new cars
    During the same period Jones buys 1 $12000 new car.

    Now enter the fico
    Smith has fico of 800 and can buy 5 more cars at 12000.Ea.
    Naturally the car dealer didn't make as much off of Jones so he is assigned a score of 500 which increases the price of 1 car for him to $17ooo.

    Now thanks to fico Jones has become as profitable as Smith.In fact more profitable because the dealer dosen't have the investment in the other 4 cars.
    This in a nut shell is exactly how fico works in the credit industry!

  20. amaineman

    amaineman Well-Known Member

    I think it is sad that the insurance industry has decided to profit from FICO scores.

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