6 ms·

The Tyranny of the Credit Score

62 points by dminor 16y ago

kareemm 16y ago
The biggest problem, imho, is that there's no incentive for the credit rating agencies to care about accuracy. I paid for 30 days access to check my credit report a few months ago and I had to fix a whole slew of errors dating back almost 10 years. When I followed up to see if they had fixed the errors, I was told that since 30 days had passed, I had to pay again to get an updated look at my credit report. Talk about messed up incentives.
- TheAmazingIdiot 16y ago
  Then I fail to understand why we cant go after the Big 3 using libel laws. It's one thing to say somebody is a smelly, poop-eating mongrel vs child rapist. One is an opinion and the other is a provable statement of fact. If, in fact, the child rapist epithet is false, it's libel. Now, these companies are selling rights to loans, along with your information and a formula they use to equate it all. If the information is just not true and affects you negatively, "sue the bastards".
  - pragmatic 16y ago
    It might be because you agree to the credit bureau being used (you usually sign something) and the company pulling it pays for it. It's not published in a public place so libel wouldn't apply (my guess anyway). Now if they put it up in the local bar (like bad checks used to be before they cracked down) then you might have a case.
- jerf 16y ago
  According to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm , credit reports for the purpose of determining if accuracy changes have been made do not count as the yearly report. However, bear in mind that covers the report of the raw data. The credit score itself is not covered by that report, and they can make you pay again for that. I don't think knowing their exact score is all that useful, compared to making sure their data is accurate.
- pragmatic 16y ago
  The big 3 are required to give you a free credit report once a year by law. There is also a dispute mechanism for each of them. Were you not able to use this or was this in addition to that? (Yeah it's messed up).
  - kareemm 16y ago
    I'm in Canada; I don't believe we've got a free credit report law here. And based on their response, after I resolved a dispute, I still had to pay to find out the outcome.
    - JimmyL 16y ago
      We do - see details at http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html. You don't get the score for free, but you do get a copy of your report (all the things listed on there that go into the calculation of the score).
- amalcon 16y ago
  I think the real issue is that we're trying to use a single number (well, three numbers, but they all purport to mean the same thing) as a predictor of whether or not an individual will pay back any given loan (or continue to pay any given bill). The lenders (or, specifically, their employees) want a single number because they want a single thing they can point to when asked to explain their decision. "How could I have expected him to default? His FICO was 750!" Imagine if we tried to apply this approach to other areas. For corporations, instead of reporting total assets, total liabilities, earnings, payments, and such, they instead give all this information to an "Accounting Disclosure Bureau", who produces an "Expected Profitability Index" based on those numbers. While the report contains other information as well, people usually just look at the EPI. Would that be a functional investment climate?
  - grandalf 16y ago
    This is a great point. In the recent past, many people's credit scores were artificially inflated due to the low perception of systemic risk in the economy. Now that that risk is better understood, the same person who had a 750 score might have a 650 score, etc., even if all payments have been made on time. I'm curious about the incentive this creates. Suppose someone had a score of 680 and was paying everything on time and had $5000 of available credit. Now, he/she has a score of maybe 640 and no available credit. What is the benefit to this person of continuing to care about any no-recourse debts in this case? He/she might imagine paying the debt off over 5 years as originally planned, or may consider abandoning/defaulting on the debt and saving the money instead, which would improve the person's financial picture over the next 5 years, and by 7 years out the default would be expunged anyway.
- Qz 16y ago
  quizzle.com gives you a 100% free credit score check every 6 months. I'm not sure if its the same level of access you're talking about, but it really is free, as opposed to all the commercials you seen on TV. It's like mint.com, they fund it by trying to hook you up with service offers.
  - adammichaelc 16y ago
    There's also http://creditkarma.com http://creditkarma.com, which allows you to check your Transunion-based creditkarma version of your credit score. Note that it's not actually your credit score, but an estimate based on all the information Transunion provides (debts, % of monthly payments made, debt utilization ratios, etc.). You can check it as many times as you want, and it doesn't hurt your credit score. It doesn't count as a "hard inquiry," but as a "consumer inquiry," so it doesn't count against you.
d78g 16y ago
This is an interesting/useful reply http://www.marginalrevolution.com/marginalrevolution/2010/07/beyond-fico.html http://www.marginalrevolution.com/marginalrevolution/2010/07...
- techsupporter 16y ago
  From that article: "A number of people (Slacktivist, Kevin Drum, Matt Yglesias, Megan Mcardle) are debating the use of credit scores in employment. Credit scores are useful at predicting all kinds of things including, for example, car accidents so there is good reason to believe that they are useful in employment." I now seriously question anything further in that article. The idea that credit scores can predict car accidents is ludicrous. The author probably meant that credit scores can be used to predict claims on automobile insurance, but that, too, is just as incorrect. Consider that many people with low credit scores are going to buy the least expensive vehicles and insurance they can find. This means carrying liability-only coverage, which does not pay to the insured, just to anyone the insured might hit. That means that the insurer is now using the credit score of the insured to "predict" the decision of a completely unknown third party who may or may not even exist. Credit scoring, when used outside the context of granting credit (and, often, even in that context), is simply a way to continue to gouge people who have, for whatever reason, a damaged set of credit reports long after that damage has occurred.
  - hugh3 16y ago
    I now seriously question anything further in that article. The idea that credit scores can predict car accidents is ludicrous. Do you find the idea that credit scores are correlated with car accident rates to be ludicrous? I find it very plausible. Some people are careful, others are careless. Of course, one should be very careful in using vague correlations to determine policy in specific cases. I bet I could draw up a correlation one way or the other between accident rates and skin colour, but you'd be in serious trouble if your insurance company tried to use that to set premiums. (Oddly though, they're allowed to take your sex and age into account.)
shaggy 16y ago
Nice article. I'll be very interested to see if the new legislation actually leads to improvements in this area. It's always made me furious that the credit bureaus collect and compile all this information about me that I already know, but then want me to pay to see it in the format they present (unless I live in a state that allows a yearly view for free).
- johnny22 16y ago
  a free annual report is available to all US citizens https://www.annualcreditreport.com/cra/index.jsp https://www.annualcreditreport.com/cra/index.jsp
- jerf 16y ago
  All "states" allow a yearly view for free, because that's actually a Federal law. See this page: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm They did stagger that law in by region, but it's completely phased in and has been for a while. Bear in mind you are entitled to a dump of the raw data they have, but you are not entitled to the final number they call your score. They make you pay for that. In general, it isn't all that useful to know that score IMHO. (At specific times, perhaps, but not in general.)
mrj 16y ago
The senior credit officer at my company will give you a long rant about the inaccuracy of credit scores if you ask about it. They use it as informational only (really high or really low might tell you something worth investigating). Each business is different, and a competent risk analyst will build an algorithm based off the portfolio's actual history. The problem is the credit score might have meaning in some cases, like unsecured debt, to show how likely you are to payoff what you have little incentive to return. It's a measure of all financial behavior, but all loans are not the same. A credit score isn't going to tell you how likely somebody is to make their mortgage. Unless there are really desperate circumstances, most people will pay their mortgage. A middle-of-the-road credit score really doesn't tell you much about how likely somebody is to have desperate circumstances. That makes it a poor predictor.
- Retric 16y ago
  The value of credit scores to banks / CC companies is the ability to sell that debt to a third party.
- anamax 16y ago
  > A credit score isn't going to tell you how likely somebody is to make their mortgage. Unless there are really desperate circumstances, most people will pay their mortgage. A middle-of-the-road credit score really doesn't tell you much about how likely somebody is to have desperate circumstances. That makes it a poor predictor. The above implies that a company that does not use credit scores when making mortgage loans will outperform one that does. What's the the name of your company that makes mortgage loans and does not use credit scores? More to the point, are you taking investment or borrowing money?
  - mrj 16y ago
    Sorry, I have to keep my online activities and work separate. :-) But I didn't mean to infer my company doesn't use credit scores... They use them plenty. >The above implies that a company that does not use credit scores when making mortgage loans will outperform one that does. The point is, while we don't really know how these algorithms work, we know they don't control for the type of loan. You just get one number. That one number is not always meaningful.
pragmatic 16y ago
As a counter point. It's funny that on a site where the virtues of algorithms are extolled daily (Google, etc), one of the first widely (and very successful) uses of the algorithm (the FICO/credit score) is decried. Companies use it because it works pretty well or well enough in most cases. Yeah there is some really bad data. However, half of that blame probably goes to the institutions reporting the data. (That's just a hunch) However, because I've worked in the finance industry for many years, I've made it a point to check my credit and try to keep it clean, because I know the credit bureaus lack the incentive to do it. I'm cursed because I have a common name and someone with the same name is very bad about paying his bills. I usually end up disputing something every other year or so.
- pragmatic 16y ago
  “If the loan criteria says you need to have a 700 credit score, and you have a 699, you don’t get the loan,” she said. “It makes me nuts.” Yes, it's called an algorithm. I'm guessing she doesn't understand that. "Their bottom line number is 620 — the company will buy mortgages only if the borrower has a credit score of 620 or above. Which means, given the current state of the mortgage market, that anyone with a score below 620 can’t get a mortgage. Even if that score is 619." The thing is regulators are looking at that number. There is a cut off there. Especially now that the regulators are going through the bank books with a fine toothed comb. Guess what, the worse you portfolio, the higher your capital requirements become. (Your margin of safety) A company I worked for bought a huge portfolio of debt. Turns out the average FICO was way off or out of date. Very bad thing. The original company had booked some really bad stuff and was one of many that went down in the waves of financial institution failures. Bad mortgages finally got them.
- jbooth 16y ago
  If Google sucks at their algorithm, I'm free to go use Bing, or not use internet search if I don't want to. If these credit companies suck at their algorithm, which they apparently do, I'm screwed. It doesn't help that they're most likely totally captured by the financial companies.
adamsmith 16y ago
Is this a business opportunity? If the premise of the article is true, that people who should be getting credit are not, why can't we start a credit-extending company that does a better job of assessing risk? One or more of three things must be true here. Either: 1) there is an untapped business opportunity here, 2) the premise of this article is false and the machine is working fine, or 3) there are regulatory barriers getting in the way of making the machine work well.
- cabalamat 16y ago
  I suspect it's a bit of all of these, but mostly 3. There are strong regulatory barriers to setting up new financial institutions -- which of course work in favour of incumbent institutions. The banking industry could do with a bit of disruption.
- illumin8 16y ago
  There is a great opportunity here, if you have unlimited funds and can hold your own loans. The problem is that nobody with the money wants to take this risk on themselves, so they need to securitize these debts. Securitization requires categorizing different loans into risk pools or tranches, which are only categorized by FICO score. In other words, sure, if you've got $billions lying around and are willing to hold 30 year loans for their full term, feel free to start a business doing this. If you're like any other bank and you want to off-load it to Fannie/Freddy immediately or securitize them and sell them to hedge funds, you need to put a FICO score on every loan and that is the only thing anyone cares about. It's obvious this is why our financial system is so screwed up. There are people with 800 credit scores that are upside down by hundreds of thousands of dollars, yet they can still get as much revolving credit as they want because of their credit scores. Then, there are people like me who have actual cash reserves in the tens of thousands and 0 debt, and refuse to hold revolving credit, who have sub-700 because we don't buy into the whole debt ponzi scheme. The system is broken and it will take a lot more than a new business model to fix it. It will literally take several acts of congress.
  - adamsmith 16y ago
    Thank you that's very helpful. Maybe hedge funds need to get into this business. Or maybe I should find a way to show hedge funds that my new risk assessment is better. Though one of the challenges is getting new types of hard-to-fake data. If my risk assessment looks at a person's email account or does machine vision on their facebook photos, those things are easily forgable.
hnal943 16y ago
The use of the credit score as an indicator of character is also frustrating for those of us that don't borrow money. Even if you don't borrow money you run into resistance trying to get insurance, etc.
- Unseelie 16y ago
  Because I've always paid with cash on hand, because I'm paying with cash, phone companies expect me to pay more. When did cash become less valuable than debt?
  - adolph 16y ago
    Depending on what you mean by phone companies, a cash transaction is generally less valuable because it doesn't generate a relationship. They have to exert themselves for each transaction.
    - Unseelie 16y ago
      Acttualy, I think it means more what I mean by cash. Which is misleading, because I'm dealing in digital money, no cash involved, but rather than a credit agency, my own bank account, ergo debit transfers. The relationship, as far as I can see, is the same as that of credit: they bill me, and I send them electronic funds. What am I missing?
MartinCron 16y ago
There is another side of credit scores, not mentioned in the original article or in the comments. There was a time, before credit scoring became ubiquitous, when you would walk into a bank and get a loan from a loan officer directly, who would have very little to go on besides what you immediately present. That meant that women and minorities, even ones who would be excellent credit risks, were less likely to be able to get credit. Sure, the current system has lots and lots of flaws (mostly from reducing everything to a single immutable number), but there's something fundamentally good behind the intention of judging people based on their concrete financial activity instead of just on the color of their skin and/or the cut of their suit.
- asnyder 16y ago
  Interestingly enough Super Crunchers (http://www.amazon.com/Super-Crunchers-Thinking-Numbers-Smart/dp/0553805401/ref=sr_1_1?ie=UTF8&s=books&qid=1280297185&sr=8-1 http://www.amazon.com/Super-Crunchers-Thinking-Numbers-Smart...) goes into this in some detail and shows that the FICO score is really another barrier to minorities. Statistically speaking it's minorities, mostly with non-white skin that don't have a credit history. It states that the score is no more than an accepted form of racial prejudice.
ghshephard 16y ago
The entire worshiping of Credit Scores is somewhat laughable to me. My Father was a mortgage broker and land developer, who developed properties and then funded the mortgages that people took out -with his own money-. That subtle difference, between selling mortgages with OPM (Other People's Money) and your own money makes for a certain "clarity of perspective." He always used to recite the Five C's, Collateral (what percentage of the value of the property where you borrowing against), Capital (How much money do you have in the bank), Capacity (what is your income) Character (what type of person are you) and Credit (The infamous credit score). When you are lending with your own money, only of those Five C's is worth a squat - and that's collateral. What percentage of the asset where you lending against. Anything north of 50% was considered risky.

62 points by dminor 16y ago

The biggest problem, imho, is that there's no incentive for the credit rating agencies to care about accuracy. I paid for 30 days access to check my credit report a few months ago and I had to fix a whole slew of errors dating back almost 10 years. When I followed up to see if they had fixed the errors, I was told that since 30 days had passed, I had to pay again to get an updated look at my credit report. Talk about messed up incentives.

TheAmazingIdiot 16y ago
Then I fail to understand why we cant go after the Big 3 using libel laws. It's one thing to say somebody is a smelly, poop-eating mongrel vs child rapist. One is an opinion and the other is a provable statement of fact. If, in fact, the child rapist epithet is false, it's libel. Now, these companies are selling rights to loans, along with your information and a formula they use to equate it all. If the information is just not true and affects you negatively, "sue the bastards".
- pragmatic 16y ago
  It might be because you agree to the credit bureau being used (you usually sign something) and the company pulling it pays for it. It's not published in a public place so libel wouldn't apply (my guess anyway). Now if they put it up in the local bar (like bad checks used to be before they cracked down) then you might have a case.
jerf 16y ago
According to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm , credit reports for the purpose of determining if accuracy changes have been made do not count as the yearly report. However, bear in mind that covers the report of the raw data. The credit score itself is not covered by that report, and they can make you pay again for that. I don't think knowing their exact score is all that useful, compared to making sure their data is accurate.
pragmatic 16y ago
The big 3 are required to give you a free credit report once a year by law. There is also a dispute mechanism for each of them. Were you not able to use this or was this in addition to that? (Yeah it's messed up).
- kareemm 16y ago
  I'm in Canada; I don't believe we've got a free credit report law here. And based on their response, after I resolved a dispute, I still had to pay to find out the outcome.
  - JimmyL 16y ago
    We do - see details at http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html. You don't get the score for free, but you do get a copy of your report (all the things listed on there that go into the calculation of the score).
amalcon 16y ago
I think the real issue is that we're trying to use a single number (well, three numbers, but they all purport to mean the same thing) as a predictor of whether or not an individual will pay back any given loan (or continue to pay any given bill). The lenders (or, specifically, their employees) want a single number because they want a single thing they can point to when asked to explain their decision. "How could I have expected him to default? His FICO was 750!" Imagine if we tried to apply this approach to other areas. For corporations, instead of reporting total assets, total liabilities, earnings, payments, and such, they instead give all this information to an "Accounting Disclosure Bureau", who produces an "Expected Profitability Index" based on those numbers. While the report contains other information as well, people usually just look at the EPI. Would that be a functional investment climate?
- grandalf 16y ago
  This is a great point. In the recent past, many people's credit scores were artificially inflated due to the low perception of systemic risk in the economy. Now that that risk is better understood, the same person who had a 750 score might have a 650 score, etc., even if all payments have been made on time. I'm curious about the incentive this creates. Suppose someone had a score of 680 and was paying everything on time and had $5000 of available credit. Now, he/she has a score of maybe 640 and no available credit. What is the benefit to this person of continuing to care about any no-recourse debts in this case? He/she might imagine paying the debt off over 5 years as originally planned, or may consider abandoning/defaulting on the debt and saving the money instead, which would improve the person's financial picture over the next 5 years, and by 7 years out the default would be expunged anyway.
Qz 16y ago
quizzle.com gives you a 100% free credit score check every 6 months. I'm not sure if its the same level of access you're talking about, but it really is free, as opposed to all the commercials you seen on TV. It's like mint.com, they fund it by trying to hook you up with service offers.
- adammichaelc 16y ago
  There's also http://creditkarma.com http://creditkarma.com, which allows you to check your Transunion-based creditkarma version of your credit score. Note that it's not actually your credit score, but an estimate based on all the information Transunion provides (debts, % of monthly payments made, debt utilization ratios, etc.). You can check it as many times as you want, and it doesn't hurt your credit score. It doesn't count as a "hard inquiry," but as a "consumer inquiry," so it doesn't count against you.

d78g 16y ago

This is an interesting/useful reply http://www.marginalrevolution.com/marginalrevolution/2010/07/beyond-fico.html http://www.marginalrevolution.com/marginalrevolution/2010/07...

techsupporter 16y ago
From that article: "A number of people (Slacktivist, Kevin Drum, Matt Yglesias, Megan Mcardle) are debating the use of credit scores in employment. Credit scores are useful at predicting all kinds of things including, for example, car accidents so there is good reason to believe that they are useful in employment." I now seriously question anything further in that article. The idea that credit scores can predict car accidents is ludicrous. The author probably meant that credit scores can be used to predict claims on automobile insurance, but that, too, is just as incorrect. Consider that many people with low credit scores are going to buy the least expensive vehicles and insurance they can find. This means carrying liability-only coverage, which does not pay to the insured, just to anyone the insured might hit. That means that the insurer is now using the credit score of the insured to "predict" the decision of a completely unknown third party who may or may not even exist. Credit scoring, when used outside the context of granting credit (and, often, even in that context), is simply a way to continue to gouge people who have, for whatever reason, a damaged set of credit reports long after that damage has occurred.
- hugh3 16y ago
  I now seriously question anything further in that article. The idea that credit scores can predict car accidents is ludicrous. Do you find the idea that credit scores are correlated with car accident rates to be ludicrous? I find it very plausible. Some people are careful, others are careless. Of course, one should be very careful in using vague correlations to determine policy in specific cases. I bet I could draw up a correlation one way or the other between accident rates and skin colour, but you'd be in serious trouble if your insurance company tried to use that to set premiums. (Oddly though, they're allowed to take your sex and age into account.)

shaggy 16y ago

Nice article. I'll be very interested to see if the new legislation actually leads to improvements in this area. It's always made me furious that the credit bureaus collect and compile all this information about me that I already know, but then want me to pay to see it in the format they present (unless I live in a state that allows a yearly view for free).

johnny22 16y ago
a free annual report is available to all US citizens https://www.annualcreditreport.com/cra/index.jsp https://www.annualcreditreport.com/cra/index.jsp
jerf 16y ago
All "states" allow a yearly view for free, because that's actually a Federal law. See this page: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm They did stagger that law in by region, but it's completely phased in and has been for a while. Bear in mind you are entitled to a dump of the raw data they have, but you are not entitled to the final number they call your score. They make you pay for that. In general, it isn't all that useful to know that score IMHO. (At specific times, perhaps, but not in general.)

mrj 16y ago

The senior credit officer at my company will give you a long rant about the inaccuracy of credit scores if you ask about it. They use it as informational only (really high or really low might tell you something worth investigating). Each business is different, and a competent risk analyst will build an algorithm based off the portfolio's actual history. The problem is the credit score might have meaning in some cases, like unsecured debt, to show how likely you are to payoff what you have little incentive to return. It's a measure of all financial behavior, but all loans are not the same. A credit score isn't going to tell you how likely somebody is to make their mortgage. Unless there are really desperate circumstances, most people will pay their mortgage. A middle-of-the-road credit score really doesn't tell you much about how likely somebody is to have desperate circumstances. That makes it a poor predictor.

Retric 16y ago
The value of credit scores to banks / CC companies is the ability to sell that debt to a third party.
anamax 16y ago
> A credit score isn't going to tell you how likely somebody is to make their mortgage. Unless there are really desperate circumstances, most people will pay their mortgage. A middle-of-the-road credit score really doesn't tell you much about how likely somebody is to have desperate circumstances. That makes it a poor predictor. The above implies that a company that does not use credit scores when making mortgage loans will outperform one that does. What's the the name of your company that makes mortgage loans and does not use credit scores? More to the point, are you taking investment or borrowing money?
- mrj 16y ago
  Sorry, I have to keep my online activities and work separate. :-) But I didn't mean to infer my company doesn't use credit scores... They use them plenty. >The above implies that a company that does not use credit scores when making mortgage loans will outperform one that does. The point is, while we don't really know how these algorithms work, we know they don't control for the type of loan. You just get one number. That one number is not always meaningful.

pragmatic 16y ago

As a counter point. It's funny that on a site where the virtues of algorithms are extolled daily (Google, etc), one of the first widely (and very successful) uses of the algorithm (the FICO/credit score) is decried. Companies use it because it works pretty well or well enough in most cases. Yeah there is some really bad data. However, half of that blame probably goes to the institutions reporting the data. (That's just a hunch) However, because I've worked in the finance industry for many years, I've made it a point to check my credit and try to keep it clean, because I know the credit bureaus lack the incentive to do it. I'm cursed because I have a common name and someone with the same name is very bad about paying his bills. I usually end up disputing something every other year or so.

pragmatic 16y ago
“If the loan criteria says you need to have a 700 credit score, and you have a 699, you don’t get the loan,” she said. “It makes me nuts.” Yes, it's called an algorithm. I'm guessing she doesn't understand that. "Their bottom line number is 620 — the company will buy mortgages only if the borrower has a credit score of 620 or above. Which means, given the current state of the mortgage market, that anyone with a score below 620 can’t get a mortgage. Even if that score is 619." The thing is regulators are looking at that number. There is a cut off there. Especially now that the regulators are going through the bank books with a fine toothed comb. Guess what, the worse you portfolio, the higher your capital requirements become. (Your margin of safety) A company I worked for bought a huge portfolio of debt. Turns out the average FICO was way off or out of date. Very bad thing. The original company had booked some really bad stuff and was one of many that went down in the waves of financial institution failures. Bad mortgages finally got them.
jbooth 16y ago
If Google sucks at their algorithm, I'm free to go use Bing, or not use internet search if I don't want to. If these credit companies suck at their algorithm, which they apparently do, I'm screwed. It doesn't help that they're most likely totally captured by the financial companies.

adamsmith 16y ago

Is this a business opportunity? If the premise of the article is true, that people who should be getting credit are not, why can't we start a credit-extending company that does a better job of assessing risk? One or more of three things must be true here. Either: 1) there is an untapped business opportunity here, 2) the premise of this article is false and the machine is working fine, or 3) there are regulatory barriers getting in the way of making the machine work well.

cabalamat 16y ago
I suspect it's a bit of all of these, but mostly 3. There are strong regulatory barriers to setting up new financial institutions -- which of course work in favour of incumbent institutions. The banking industry could do with a bit of disruption.
illumin8 16y ago
There is a great opportunity here, if you have unlimited funds and can hold your own loans. The problem is that nobody with the money wants to take this risk on themselves, so they need to securitize these debts. Securitization requires categorizing different loans into risk pools or tranches, which are only categorized by FICO score. In other words, sure, if you've got $billions lying around and are willing to hold 30 year loans for their full term, feel free to start a business doing this. If you're like any other bank and you want to off-load it to Fannie/Freddy immediately or securitize them and sell them to hedge funds, you need to put a FICO score on every loan and that is the only thing anyone cares about. It's obvious this is why our financial system is so screwed up. There are people with 800 credit scores that are upside down by hundreds of thousands of dollars, yet they can still get as much revolving credit as they want because of their credit scores. Then, there are people like me who have actual cash reserves in the tens of thousands and 0 debt, and refuse to hold revolving credit, who have sub-700 because we don't buy into the whole debt ponzi scheme. The system is broken and it will take a lot more than a new business model to fix it. It will literally take several acts of congress.
- adamsmith 16y ago
  Thank you that's very helpful. Maybe hedge funds need to get into this business. Or maybe I should find a way to show hedge funds that my new risk assessment is better. Though one of the challenges is getting new types of hard-to-fake data. If my risk assessment looks at a person's email account or does machine vision on their facebook photos, those things are easily forgable.

hnal943 16y ago

The use of the credit score as an indicator of character is also frustrating for those of us that don't borrow money. Even if you don't borrow money you run into resistance trying to get insurance, etc.

Unseelie 16y ago
Because I've always paid with cash on hand, because I'm paying with cash, phone companies expect me to pay more. When did cash become less valuable than debt?
- adolph 16y ago
  Depending on what you mean by phone companies, a cash transaction is generally less valuable because it doesn't generate a relationship. They have to exert themselves for each transaction.
  - Unseelie 16y ago
    Acttualy, I think it means more what I mean by cash. Which is misleading, because I'm dealing in digital money, no cash involved, but rather than a credit agency, my own bank account, ergo debit transfers. The relationship, as far as I can see, is the same as that of credit: they bill me, and I send them electronic funds. What am I missing?

MartinCron 16y ago

There is another side of credit scores, not mentioned in the original article or in the comments. There was a time, before credit scoring became ubiquitous, when you would walk into a bank and get a loan from a loan officer directly, who would have very little to go on besides what you immediately present. That meant that women and minorities, even ones who would be excellent credit risks, were less likely to be able to get credit. Sure, the current system has lots and lots of flaws (mostly from reducing everything to a single immutable number), but there's something fundamentally good behind the intention of judging people based on their concrete financial activity instead of just on the color of their skin and/or the cut of their suit.

asnyder 16y ago
Interestingly enough Super Crunchers (http://www.amazon.com/Super-Crunchers-Thinking-Numbers-Smart/dp/0553805401/ref=sr_1_1?ie=UTF8&s=books&qid=1280297185&sr=8-1 http://www.amazon.com/Super-Crunchers-Thinking-Numbers-Smart...) goes into this in some detail and shows that the FICO score is really another barrier to minorities. Statistically speaking it's minorities, mostly with non-white skin that don't have a credit history. It states that the score is no more than an accepted form of racial prejudice.

ghshephard 16y ago

The entire worshiping of Credit Scores is somewhat laughable to me. My Father was a mortgage broker and land developer, who developed properties and then funded the mortgages that people took out -with his own money-. That subtle difference, between selling mortgages with OPM (Other People's Money) and your own money makes for a certain "clarity of perspective." He always used to recite the Five C's, Collateral (what percentage of the value of the property where you borrowing against), Capital (How much money do you have in the bank), Capacity (what is your income) Character (what type of person are you) and Credit (The infamous credit score). When you are lending with your own money, only of those Five C's is worth a squat - and that's collateral. What percentage of the asset where you lending against. Anything north of 50% was considered risky.