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FICO and credit; credit 'literacy'; experiences?
Old 07-23-2008, 10:47 AM   #1
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FICO and credit; credit 'literacy'; experiences?

On the "stupid debtor" thread, some people started talking about financial literacy and Citric Acid brought up FICO as a litmus test.

I had come across a couple of interesting threads in the past week or so of surfing:

Elizabeth Warren on the Credit Card Industry : NPR

CreditBloggers: FICO's Credit Score Change will Cause Mortgage Industry to "Crumble"

I have always been virtually debt-free so I never gave a second thought to my FICO score. I did hear though, that the very act of checking one's own score will lower the score (requests for credit checks = bad)!

Just to tweak the noses of the anti-gov. folks.. I'll throw out the question of whether something that has so much to do with people's daily lives and financial universe should rest solely in the hands of a couple private companies with little/no recourse and no accountability? If not, are there ways to obtain civil damages against them if they put a stick through your wheels without justification, through their own error?

What are people's FICO experiences? Copacetic? Minor difficulties? Nightmarish?

With so many potentially unrelated and unknowable (proprietary) factors going into someone's credit score, besides just the level of erroneous data.. do you think it is very/marginally/not very accurate in gauging credit-worthiness?

I know CFB recounted some nonsense he went through; it would be interesting to know whether that is the rare exception or the norm.
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Old 07-23-2008, 11:02 AM   #2
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http://www.bcsalliance.com/creditscore_checking.html

Quote:
Does Checking Your Credit Report Lower Your Credit Rating?


Checking your FICO credit score or pulling your own credit report does not hurt your credit rating. The credit scoring system is set up so that inquiries made by a consumer checking his or her own credit score or credit report do not count in any way whatsoever towards lowering or raising one's credit score.


Credit inquiries made by credit card companies or mortgage lenders checking your credit report to send you pre-approved offers do not count either. If they did, every American would have a very low credit score.


My wife has no false info on her account. I have one false positive (account I never had showed as closed/paid in full).

I think a FICO score is useful at the edges but I wouldn't know either way as it's never impacted my ability to purchase (knock on wood). I'm guessing a false negative like an unlawful detainer or lien would be much more damaging that a false negative like an account you never had or a payment showing as missed when it wasn't. Statistical analysis would be interesting... how many false hits as a percentage of the population by severity.

I did have a friend who had to delay his start date here... not related to FICO, but somewhere along the way a misdemeanor parking violation was flagged as a felony. That took a week to fix.
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Old 07-23-2008, 11:43 AM   #3
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Originally Posted by ladelfina View Post
Just to tweak the noses of the anti-gov. folks.. I'll throw out the question of whether something that has so much to do with people's daily lives and financial universe should rest solely in the hands of a couple private companies with little/no recourse and no accountability? If not, are there ways to obtain civil damages against them if they put a stick through your wheels without justification, through their own error?
The companies that develop credit scores are accountable. If the scores held little or no predictive power, NO ONE WOULD PURCHASE THEM. There are no government rules mandating credit scoring standards (ie. only lend to FICO>500). The FICO score (as well as competing scores developed by the credit bureaus) is used by lenders because it is a helpful screen.

The FICO score is a predictive score, calibrated to different credit products, to a certain good to bad ratio. So an account with a score of XXX will go "bad" 1 time out of 50 for Y credit product, where Y is a mortgage/credit card/auto loan/etc. They are not "wrong" insofar as they are only talking about probabilities; someone with your credit qualifications will stop paying 2% of the time, for example. The errors are in reporting to the credit agencies, and the agencies work diligently to compile accurate information. If they were filled with inaccuracies, lenders would not buy their reports.
Quote:
With so many potentially unrelated and unknowable (proprietary) factors going into someone's credit score, besides just the level of erroneous data.. do you think it is very/marginally/not very accurate in gauging credit-worthiness?
1) If there are errors in your credit file, you can fix them. It behooves everybody for the information to be accurate.
2) The factors are proprietary so people will not game the system. If everyone knew how to artificially raise their score with a few quick tricks (beyond the common sense stuff you find in books and blogs, like pay your bills on time), the score would be less accurate as a predictor.
3) The change in the scoring (in your second link) is a way to eliminate a type of mortgage fraud. I'm not sure why you would oppose a measure that closes the loophole allowing bad credit applicants to get larger loans than they would otherwise. Isn't that what got us into this mess?
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Old 07-23-2008, 11:48 AM   #4
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I think that the use of FICO scores, especially for things like auto insurance rates and the like, to make a lot of sense for businesses. I do think that the predictive quality of this sort of score is quite good. The customer of the FICO score is the business, and like Marquette said, they wouldn't buy it if it didn't work.

I check my credit report from the three bureaus, on the free schedule, but have never paid to know my score. I consider making sure there are no errors to be my responsibility.
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Old 07-23-2008, 12:00 PM   #5
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abreutime.. on your point #3, I don't oppose it!

I was alarmed that there had been such ways of manipulating it.. which makes me fear there are other ways perhaps not being addressed. Which then render the system unreliable.
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Old 07-23-2008, 12:02 PM   #6
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The problem with trying to regulate FICO or other scoring sytem is what are you going to regulate?

I can see having requirements that they fix any bad info when told, but if everything is 'correct' from whatever source then is it their fault if it is wrong? Not in my opinion....

And as others have said, if there were not value in them, they would go out of business...

Think of the TV ratings.... why should what we watch be determined by 30K people who may or may not actually watch what is on the TV... this is basically determined by 2 companies ratings...

but if the business people can not make their own decision... well, shame on them...
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Old 07-23-2008, 12:54 PM   #7
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Abreutime was the one who brought it up, the actual idea of the financial literacy test, I just gave my entirely subjective interpretation about the distribution for our country 8)

I am going to have to chime in with Abreutime on this one, the fact that many of the lending institutions use the FICO score is not because it is government mandated, but because it is actually a good predictor of how many people will fail. It does not say if you have a FICO of 530, you will default, but that of those who have XXX score, then Y% will default. In this sense, the companies who package their investments and need a proper ROI will be able to come closer to understanding the true value of the loan they are about to make.

The reason the private institution I feel is better for this is because their success as a company relies solely upon their success rate as a predictor. If the government were involved (regulating or performing the score itself), then there would be no accountability or flexibility in how the scores are interpreted or done, as well as their revenue/success not being tied in to how well they do. If someone thinks the scores are such a horrible job, I suggest making your own company and start publishing your own scores. It will be tough to find business because the creditors like the information and reliability they get from the FICO scores.
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Old 07-23-2008, 01:08 PM   #8
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Originally Posted by ladelfina View Post
abreutime.. on your point #3, I don't oppose it!

I was alarmed that there had been such ways of manipulating it.. which makes me fear there are other ways perhaps not being addressed. Which then render the system unreliable.
Cool, then we're in agreement.

Regarding the loophole that's being closed, it's not a fault of FICO or any of the credit scores. Base on the link provided, it seems like it was a technique that some mortgage brokers used to bypass the standards set by their institutions. It seems more like an internal standards problem. It creates a portfolio worse than it appears. Alas, since these portfolios are being bundled and sold to Fannie and Freddie, it seems reasonable for the government to protect their "investment." (I would rather the 2 companies making the transaction just disclose this information/fraud and price it accordingly, but this is a fine resolution.)
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Old 07-23-2008, 01:41 PM   #9
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I think FICO is a good indicator but that banks use the score in a terrible fashion. If someone has a great score then it's probably a good idea to lend them some money, maybe even lend them alot of money. If someone has a poor score then the should not be lended anything but a small amount, not the same amount as someone with good credit but with a high interest rate. Slapping a high interest rate on someones loan resulting in higher monthly payments is not going to make it any more likely that that person is going to repay the loan; likely it does the opposite.

The FICO score should be limiting as to how much the bank wants to bet on a person not a system to determine how much return they get if the person does manage to pay the loan back. It seems insane to me that you would loan out an unlimited amount of money to someone who is unlikely to pay you back as long as they give you a certain rate of return and make enough money that they can just make the payments.
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Old 07-23-2008, 01:59 PM   #10
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...............
I have always been virtually debt-free so I never gave a second thought to my FICO score.............
I noticed that when I changed my home insurance, my FICO score was one of the factors that set the premium. So even if you don't borrow any money, your FICO score can still bite you.
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Old 07-23-2008, 02:07 PM   #11
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I've heard a few horror stories about people being unable to get false information removed from their credit reports.

What recourse do people have if the credit reporting agencies refuse to remove false information?


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1) If there are errors in your credit file, you can fix them. It behooves everybody for the information to be accurate.
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Old 07-23-2008, 02:08 PM   #12
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Originally Posted by ladelfina View Post
Just to tweak the noses of the anti-gov. folks.. I'll throw out the question of whether something that has so much to do with people's daily lives and financial universe should rest solely in the hands of a couple private companies with little/no recourse and no accountability? If not, are there ways to obtain civil damages against them if they put a stick through your wheels without justification, through their own error?
Consider me tweaked.

My daughter had an issue with FICO when she was trying to get her first apartment. It wasn't fun, but it got straightened out fairly quickly.

On the other hand, try to get your name taken off the Do Not Fly list. As far as I know, only Ted Kennedy has successfully done so. There is NO process in place for going it. Ask the thousands of John Smiths who try to fly and have to jump through hoops every time.

And how about appealing a parking ticket in DC or Boston? Reason Magazine - Hit & Run > In D.C., No More Due Process for Parking Tickets
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Old 07-23-2008, 02:15 PM   #13
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Slapping a high interest rate on someones loan resulting in higher monthly payments is not going to make it any more likely that that person is going to repay the loan; likely it does the opposite.
It sounds like you are suggesting that higher rates for higher risk debtors is a somehow perverse idea. Think of two things first, the reason the payment is higher is because they already have a higher chance of defaulting, so the ones that don't default need to be able to pay for those who do... in other words getting return in exchange for risk.

And, also think about what it would be like if it were the opposite. If making a higher payment made those with bad credit unable to pay, then you would charge those with bad credit less (because they can't pay it if it were high). Think about the perverse incentive that would be. Come on, I want my credit score to go down so my payments will be lower...
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Old 07-23-2008, 03:18 PM   #14
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I've heard a few horror stories about people being unable to get false information removed from their credit reports.

What recourse do people have if the credit reporting agencies refuse to remove false information?
You can sue for damages under the Fair Credit Reporting Act.

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Old 07-23-2008, 04:28 PM   #15
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thanks for that info, SecondCor..

One of the more disturbing things I read was a comment elsewhere from a retired person who decided to get a PT job at a HOA cleaning their pool, for pocket money. According to him, he was subjected to a criminal background check, drug screen and credit check!!

I'm just asking myself how people who for whatever reason have a chequered financial history now can be barred from even the most minimal menial employment!? How can you work your way towards good credit, if poor credit blocks you from cleaning pools for a living? I just thought that was over-the-top!
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Old 07-23-2008, 05:34 PM   #16
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thanks for that info, SecondCor..

One of the more disturbing things I read was a comment elsewhere from a retired person who decided to get a PT job at a HOA cleaning their pool, for pocket money. According to him, he was subjected to a criminal background check, drug screen and credit check!!

I'm just asking myself how people who for whatever reason have a chequered financial history now can be barred from even the most minimal menial employment!? How can you work your way towards good credit, if poor credit blocks you from cleaning pools for a living? I just thought that was over-the-top!
No problem; if he has a criminal past he could always get a job in day care or financial advising or politics.

Ha
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Old 07-24-2008, 02:27 PM   #17
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So even if you don't borrow any money, your FICO score can still bite you.
This is exactly my problem with the ever increasing number of ways that the credit score is being used as a short hand way of assessing everybody's character. I should not have to play the debt game to be able to get favorable insurance rates or whatever else the credit score may be used for these days.

The only thing this score assesses is your use of debt. So the way things are going everybody has to play the game of "building your debt history" and improving your credit score. We're all being sucked into this and being manipulated to using more credit.

Where is it going to stop?
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