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Posted by John A. Weeks III on May 19, 2008, 8:14 pm
> > For purposes of this thread, it seems the distinction is
> > irrelevant, as the FICO score forecasts *payment* ability,
> > regardless of whether those payments are to close out a
> > credit balance, settle a utility bill, pay rent on an
> > apartment, or return borrowed money.
> >
> > The huge thing that is missing from the forecast, of
> > course, is the existence of present or future income, or
> > liquid assets. What strikes me as peculiar is that I can
> > have a great FICO score, take out a huge loan,
>
> But of course, one generally cannot get a mortgage loan
> without a satisfactory income. I think what is missing from
> the thread is that, per many sources, the three Cs of
> mortgage underwriting are credit, capacity, and collateral.
> The FICO score takes into account only the credit part.
> Capacity takes into account income (not just amount but type
> of income and so apparent stability).
I guess I even dispute that statement. FICO does not look at
assets or savings, only debts. I think credit part has to
include assets to be fair. After all, is someone like Bill
Gates a bad credit risk if he has no loans outstanding, and
thus a zero FICO? And if a person can handle a $200K loan,
but also has another $100K in the bank, aren't they a better
risk than someone with $0K in the bank and $50K in credit card
debt?
I still only see FICO as a measure of how badly a bank can
rip you off, not what a great deal they can give you.
-john-
--
======================================================================
John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
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Posted by joetaxpayer on May 19, 2008, 9:02 pm
John A. Weeks III wrote:
> I guess I even dispute that statement. FICO does not look at
> assets or savings, only debts. I think credit part has to
> include assets to be fair. After all, is someone like Bill
> Gates a bad credit risk if he has no loans outstanding, and
> thus a zero FICO? And if a person can handle a $200K loan,
> but also has another $100K in the bank, aren't they a better
> risk than someone with $0K in the bank and $50K in credit card
> debt?
>
> I still only see FICO as a measure of how badly a bank can
> rip you off, not what a great deal they can give you.
>
> -john-
But John, since income is not part of the FICO score, nor are assets,
it's possible, however unlikely, that Bill's FICO is not great.
Is he actually a bad risk? Of course not. When we last went around on
FICO, I thought we agreed that FICO created a number offering a
likelihood of default, not a measure of one's ability to pay anything.
I pull $30000 off a zero interest deal, and deposit the money to earn
5%. FICO sees that I grabbed a new card and maxed it. It doesn't see
where the money went.
I decide I hate XYZbank and cancel two cards I've had for a while. FICO
score drops.
I struggle to pay three high interest cards off, and somehow find two
cards that will permanently lower the rate while transferring the debt,
and I cancel the three old cards. FICO just got trashed.
There's no one at Fair Isaac asking questions, looking over one's
shoulder. Just a series of equations.
Joe
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Posted by John A. Weeks III on May 19, 2008, 9:19 pm
> John A. Weeks III wrote:
>
> > I guess I even dispute that statement. FICO does not look at
> > assets or savings, only debts. I think credit part has to
> > include assets to be fair. After all, is someone like Bill
> > Gates a bad credit risk if he has no loans outstanding, and
> > thus a zero FICO? And if a person can handle a $200K loan,
> > but also has another $100K in the bank, aren't they a better
> > risk than someone with $0K in the bank and $50K in credit card
> > debt?
> >
> > I still only see FICO as a measure of how badly a bank can
> > rip you off, not what a great deal they can give you.
> >
> > -john-
>
> But John, since income is not part of the FICO score, nor are assets,
> it's possible, however unlikely, that Bill's FICO is not great.
> Is he actually a bad risk? Of course not. When we last went around on
> FICO, I thought we agreed that FICO created a number offering a
> likelihood of default, not a measure of one's ability to pay anything.
OK, I'll grant that. My line of thought is that if you have a plan
B and a plan C, you are much less likely to default. But of plan
B and plan C are assets or savings rather than income or credit
limit, FICO doesn't look at it. In my case, I'd rather than assets
than income or credit as a backup plan.
-john-
--
======================================================================
John A. Weeks III 612-720-2854 john@johnweeks.com
Newave Communications http://www.johnweeks.com
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Posted by Mark Bole on May 19, 2008, 9:31 pm
John A. Weeks III wrote:
> FICO does not look at
> assets or savings, only debts.
Not too many months ago from the archives, Elle posted an informative link,
http://www.myfico.com/Downloads/Brochures.aspx
Fair Isaac clearly states the FICO score is based *only* on what is in
the credit report. Since you have three credit reports, you have three
official FICO scores.
Since the FICO score is derived exclusively from the credit report(s),
it stands to reason that if you are going to spend time or money
reviewing anything, it should be the source of the data, namely the
(free annual) credit report, and not the (for-a-fee) FICO score. If you
are actively trying to change your score, the only way you'll know how
you're doing is to obtain it periodically.
> I think credit part has to
> include assets to be fair. After all, is someone like Bill
> Gates a bad credit risk if he has no loans outstanding, and
> thus a zero FICO?
As a lender, I'd want to know why he suddenly wanted to take out a loan
-- what does he know about the future of his income and his assets that
I don't? ;-)
> And if a person can handle a $200K loan,
> but also has another $100K in the bank, aren't they a better
> risk than someone with $0K in the bank and $50K in credit card
> debt?
No, the $100K in the bank could have appeared yesterday, or be gone
tomorrow -- for example, it could just be the proceeds of another loan!
> I still only see FICO as a measure of how badly a bank can
> rip you off, not what a great deal they can give you.
I agree the FICO is designed primarily for the benefit of the lender.
Your (John's) comment is focused on the items in Fair Isaac's product
line that they call "precision marketing", the FICO is a risk assessment
tool. But at least you can get your hands on it, even if at a cost
(the folks who work at Fair Isaac are not volunteers). Better than
having it be a secret, which, I recall, it was in the early days.
As joetaxpayer has noted in the past, some people think of the FICO
score in much the same way as they think the SAT/LSAT/GMAT academic
score, whether a good thing or not. I see some parallels, including a
parallel to John's observation -- the higher your academic score, the
more likely a high-priced Ivy League school can reel you in, instead of
a more reasonably priced local or state school.
-Mark Bole
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Posted by Elle on May 21, 2008, 5:42 pm
Elle wrote
>> But of course, one generally cannot get a mortgage loan
>> without a satisfactory income. I think what is missing
>> from
>> the thread is that, per many sources, the three Cs of
>> mortgage underwriting are credit, capacity, and
>> collateral.
>> The FICO score takes into account only the credit part.
>> Capacity takes into account income (not just amount but
>> type
>> of income and so apparent stability).
>
> I guess I even dispute that statement. FICO does not look
> at
> assets or savings, only debts. I think credit part has to
> include assets to be fair. After all, is someone like
> Bill
> Gates a bad credit risk if he has no loans outstanding,
> and
> thus a zero FICO?
Serious question: Why do so many people think that a person
with no loans outstanding has no FICO score? I am assuming
loans here do not include that provided for 30 days or so by
credit card companies to customers who pay the balance in
full every month. A person who pays their CC balance every
month and their utilities on time and has done so for a
certain number of years should have a FICO score.
Not sure about the rest of your points. Kinda sounds like
semantics. Creditworthiness means... ? Perhaps different
things to you, the banks, me. Either way, assets are taken
into account under the three Cs guideline.
snip because I think the three Cs responds. Plus again, this
is not an exact science. Also, those with no credit score
can do as you mentioned: Seek a manual underwriter. Though I
am not sure this gives better rates today. Automated
underwriting has become so common that its expense is low
and, from my reading, it would seem its pretty reliable. If
reliability can be measured.
> I still only see FICO as a measure of how badly a bank can
> rip you off, not what a great deal they can give you.
FWIW, somehow it seems to me as well that there is some kind
of commercialized push to get people to take on debt (with
crappy interest rates) to boost their score. Nonsense. Given
only the two viewpoints, I favor yours (and Skip's and
several others' here). Namely, keep one's nose clean (debt
wise), pay one's bills in a timely fashion, have I guess
maybe at most two credit cards (paying off balances in full
each month)*, give it all a few years, and one should have a
fine credit score. Live within one's means.
*Too lazy to see whether at least credit cards (but no other
"loans") are still necessary to have a FICO score.
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to keep the conversations on-topic for financial planning. Other posting
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