3 ms·

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

by 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.

by amalcon 16y ago

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.